Authored by Smith + Howard Wealth Management.
Wealthy Individuals often employ a wide range of estate planning strategies to minimize their estate’s potential tax burden. Among the most common is the Irrevocable Life Insurance Trust (ILIT), a trust that is the owner and beneficiary of a life insurance policy covering an individual or couple.
There are a variety of reasons to employ an ILIT, from minimizing overall estate and gift taxes to providing beneficiaries with sufficient liquidity to meet any estate tax obligations. Understanding exactly how an ILIT should be structured and managed is key to employing this strategy successfully, and there are various considerations that individuals should bear in mind before establishing an ILIT.
In this overview, we explain how an Irrevocable Life Insurance Trust works, walking through a hypothetical example to demonstrate the potential tax benefits for wealthy individuals. We will also outline how to establish an ILIT and explore several nuances that individuals should consider before starting the process of establishing this trust.
Irrevocable Life Insurance Trusts, typically referred to as ILITs, are a relatively simple way for wealthy individuals and couples to minimize the estate taxes their assets will be subjected to upon their death.
ILITs are typically used by ultra-high net worth individuals and couples whose assets exceed the lifetime exemption. Today, the lifetime exemption for an individual is $12.92 million, doubled for married couples. However, in 2026, this lifetime exemption is set to be reduced to a much lower level, potentially bringing the ILIT’s strategy back in demand.
An ILIT is the owner and beneficiary of a life insurance policy on an individual or both spouses. Each year, an amount equivalent to the premium payments on the policy is gifted to the ILIT by the grantors, and the ILIT then makes these payments to the insurance company. These gifts are irrevocable and count toward the insured’s lifetime exemption if they exceed the annual gift tax exclusion – currently $17,000 per individual, double for married couples.
An ILIT can own an individual policy or a second-to-die life insurance policy that only pays out on the passing of the second spouse. ILITs most often own permanent life insurance policies, but can also be structured to own term insurance policies. When the insured party or parties pass, the payout from the life insurance policy is paid to the ILIT, which distributes these funds according to the terms of the trust. Crucially, these funds are not considered part of an individual’s estate.
Individuals who own a life insurance policy in their name will have the death benefit included in their estate. An ILIT effectively transfers these benefits out of an individual’s estate.
To understand the estate tax benefits offered by an ILIT, it’s helpful to consider the following example that demonstrates the potential savings wealthy individuals and couples can realize.
In this example, a couple has an estate valued at $50,000,000. Both spouses have a lifetime exemption of $12,920,000, for a joint exemption of $24,840,000.
This leaves the following estate tax exposure:
Estate Value: $50,000,000
Lifetime Exemption: – $25,840,000
Subject to Estate Tax: $24,160,000
Estate Tax (40%): $9,664,,000
Let’s say that this couple chooses to use an ILIT to purchase a second-to-die life insurance policy with a death benefit of $15,000,000 and $100,000 annual premium for 10 years. Each year, the couple gift $100,000 to the ILIT to pay the policy premiums and keep the policy in force. Total premiums paid over 10-years were $1,000,000. However, the couple was able to use their annual gift exclusions of $34,000, so their total gift to the ILIT – or rather, the amount of lifetime exemptions used – was $660,000.
When the second spouse passes away after 10 years, the $15,000,000 death benefit will be distributed to the ILIT, which then allocates these funds per the trust documents. Often, the benefits can replace assets the family used to pay the estate tax, or buy illiquid assets from the estate, providing liquidity to pay the estate tax liability.
In the example above, the estate tax is entirely covered by the death benefit from the life insurance policy – via methods mentioned above – plus additional benefits totaling $4,928,000.
The process of establishing an irrevocable life insurance trust is relatively straightforward. The trust will apply for coverage on the grantor and the insurance company will provide an offer. The grantor then works with estate planning professionals and lawyers to establish an ILIT to be the owner and beneficiary of the policy.
It’s possible to transfer an existing life insurance policy to an ILIT, although this is subject to a three-year lookback period. This means that if the insured parties pass within the first three years of the ILIT, the death benefits of the policy will be brought back into the decedent’s estate.
ILITs are an extremely valuable estate planning tool, but it’s important for individuals to fully consider the implications of establishing one before setting up an ILIT. Some of the nuances to consider include:
By working with experienced estate planning professionals, wealthy individuals can ensure that an ILIT or other estate planning strategies are structured in a manner compatible with the individual’s short and long-term financial goals.
Originally posted: An Overview of Irrevocable Life Insurance Trusts – Smith and Howard Wealth Management (smithhowardwealth.com). To receive an alert when these articles are published, sign up for our newsletter [email protected]
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