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An Introduction to Irrevocable Life Insurance Trusts (ILITs)

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by

Duane Bolinger
in , ,

An ILIT, short for Irrevocable Life Insurance Trust, is a trust fund that you create during your lifetime and fund with one or more life insurance policies. Once established, an ILIT generally cannot be changed or revoked, meaning its terms are set in stone.

Benefits of an ILIT

  1. Estate Tax Exclusion: An ILIT can help exclude the death benefit of your life insurance policy from your estate for federal estate tax purposes. This strategy allows you to direct how and when the death benefit is used and for whom, giving you control even after your passing.
  2. Financial Security: Funding an ILIT with life insurance can provide the necessary cash to cover estate taxes and other expenses, eliminating the need to sell high-value assets like a business.
  3. Gift Tax Exclusion: By using annual gifts to pay the premiums on life insurance held in the trust, you can fully leverage the annual gift tax exclusion, currently set at $19,000 per beneficiary in 2026.

Possible Downsides Involved with ILITs

  1. Loss of Control: Creating an ILIT requires giving up control over the assets held within the trust, including who the beneficiaries are and how they receive the assets.
  2. Loss of Personal Use: The life insurance policy in an ILIT transitions from a personally owned asset, used for personal and retirement expenses, to a trust-owned asset primarily for legacy purposes.
  3. Costs: Setting up and maintaining an ILIT may involve professional fees and gift tax filings, adding to the overall cost of estate planning.

Other Considerations 

  1. State Estate Taxes: Some states impose their own estate taxes, and an ILIT can help cover those taxes and provide liquidity for other expenses.
  2. Additional Protections: Besides tax benefits, an ILIT offers protection from divorce, creditors, probate, and can be used to safeguard inheritances for minors or loved ones with special needs.

Ultimately, whether an ILIT is right for you depends on your specific financial situation, goals, and estate planning needs. A financial advisor or estate attorney can help you assess the pros and cons and determine the best approach for your estate plan.