The Short Answer
An irrevocable life insurance trust, or ILIT, is an irrevocable trust that owns a life insurance policy on your life. Because the trust owns it rather than you, the death benefit is not part of your taxable estate, so the full payout passes to your family free of federal estate tax. The trust receives the money and uses it the way you direct, often to hand your family immediate cash or to cover an estate-tax bill, without the proceeds themselves being taxed.
The Problem It Solves
Here is the surprise that catches large estates: a life insurance policy you own is included in your estate. For an estate above the federal exemption, up to 40% of that death benefit can be lost to estate tax, the exact opposite of what the insurance was meant to do. Worse, families are sometimes forced to sell a home or a business quickly just to pay the tax. An ILIT keeps the policy out of your estate, so the benefit arrives whole and gives your family the cash to avoid a fire sale.
How It Works
- The trust owns the policy and is its beneficiary. Often the ILIT buys a new policy directly, so there is no transfer to worry about.
- You fund the premiums by gifting money to the trust each year. Using Crummey withdrawal rights, those gifts qualify for the annual gift-tax exclusion, and the trustee pays the premium.
- At your death, the proceeds go into the trust, outside your estate, and pass to your family under your terms.
One rule to know: if you move an existing policy into an ILIT and die within three years, the benefit is pulled back into your estate. Buying a new policy inside the ILIT avoids that, and we plan around it when an existing policy is involved.
Have a large estate, or a business your family could be forced to sell?
Book a free 30-minute consult. We will tell you honestly whether an ILIT is worth it for you, and set it up correctly if it is.
Book your free consultWhen an ILIT Is Worth It (and When It Is Not)
An ILIT earns its keep for larger estates that may owe federal estate tax, for families that need liquidity to avoid selling a home or business under pressure, and for equalizing inheritances, say one child inherits the company and the others receive insurance. For most families, whose estates are well under the roughly $15 million federal exemption, an ILIT is unnecessary, and a simpler plan does the job. It is one tool in the broader irrevocable trust toolkit, and we recommend it only when it genuinely fits.
Frequently Asked Questions
What Is an Irrevocable Life Insurance Trust (ILIT)?
It is an irrevocable trust that owns a life insurance policy on your life. Because the trust owns the policy (not you), the death benefit is not counted in your taxable estate, and the proceeds pass to your family free of federal estate tax. The trust collects the payout and uses it under the terms you set, often to give the family immediate cash or to cover an estate-tax bill, without that money itself being taxed.
Why Not Just Own the Policy Myself?
Because a policy you own is included in your taxable estate. For a large estate, that can mean up to 40% of the death benefit lost to federal estate tax, the opposite of what insurance is for. An ILIT removes the policy from your estate so the full benefit reaches your family. For smaller estates that owe no federal estate tax, an ILIT may be unnecessary, and we will tell you honestly whether you need one.
What Is the Three-Year Rule?
If you transfer an existing policy you already own into an ILIT and then die within three years, the IRS pulls the death benefit back into your taxable estate. That is why ILITs are often set up to buy a new policy directly, so there is no transfer and no three-year exposure. If we are moving an existing policy, we plan around this rule and explain the timing risk.
How Do I Pay the Premiums?
You give money to the trust each year, and the trustee uses it to pay the premiums. To make those gifts qualify for the annual gift-tax exclusion, the trust uses what are called Crummey powers: the beneficiaries get a brief right to withdraw the gift, which they decline, and the gift then funds the premium. It sounds technical, but it is routine, and we handle the notices that keep it valid.
What Can an ILIT Be Used For?
Three common goals: providing tax-free liquidity so your family can pay an estate-tax bill or expenses without selling the house or the business in a hurry; leaving a large, protected legacy to your heirs; and equalizing inheritances, for example when one child will inherit the family business and the others receive the insurance instead. It is a planning tool for larger or less-liquid estates, not an everyday document.
Do I Give Up Control?
Yes, by design. An ILIT is irrevocable, so you cannot be the trustee, change the policy at will, or take it back, which is exactly what keeps it out of your estate. You do set the terms up front, choose the trustee and beneficiaries, and decide how the proceeds are used. As with any irrevocable trust, the loss of control is the price of the tax benefit, and it has to be a trade you are comfortable with.
Does Florida Tax the Insurance?
No. Florida has no state estate tax, so an ILIT is purely a federal estate-tax tool. That makes Florida a clean place to use one: you are planning around the federal tax only, with no state layer. Whether an ILIT is worth it depends on the size of your estate and your goals, which we confirm at the consult.
Common Situations
The business owner. A founder’s estate is mostly tied up in his company, well over the federal exemption. An ILIT holds a policy whose tax-free payout gives his family the cash to pay the estate tax, so they keep the business instead of selling it in a hurry.
Equalizing the kids. One daughter will run the family business; the other two are not involved. An ILIT funds insurance for the two so all three children are treated fairly, without carving up the company.
The estate that did not need one. A couple worth $4 million asks about an ILIT after reading about it. Because they are far under the federal exemption, they owe no estate tax, and we steer them to a simpler plan instead of selling them complexity.
Sources of Law
- IRC §2042 (life insurance included in the estate when the insured holds incidents of ownership); §2035 (the three-year rule on transferred policies); the annual gift-tax exclusion and Crummey withdrawal rights (Crummey v. Commissioner). (retrieved 2026-06-08)
- Florida Trust Code, Fla. Stat. ch. 736 (irrevocable trusts). Florida has no state estate tax; this is a federal estate-tax tool.
Updated on June 8, 2026. Reviewed by Kevin D. Klagge, Esq., Fla. Bar No. 99502. General information about federal and Florida law, not legal or tax advice, and no attorney-client relationship is created. Whether an ILIT fits depends on your estate and goals, and federal law may change; nothing here is a guarantee. Do not send confidential information until we have agreed to represent you.