An Irrevocable Life Insurance Trust (ILIT) is a trust that:
- Owns one or more life insurance policies
- Receives the death benefit when the insured dies
- Distributes the proceeds according to the trust terms
- Cannot be changed or revoked once created (with very limited exceptions)
Why do I want to do that? Why not just give the death benefit to beneficiaries?
1. Control Over How the Death Benefit Is Used
The ILIT lets the grantor dictate:
- Timing (lump sum, staggered, discretionary)
- Purpose (education, support, taxes, buy‑sell funding)
- Protections (spendthrift, divorce, creditor shielding)
2. Death Benefit Is Not a Taxable Gift
Distributions from an ILIT to beneficiaries do NOT count toward the $15M lifetime gift/estate exemption.
3. Keeps the Life Insurance Proceeds OUT of the Taxable Estate
This is the primary ILIT benefit.
If the insured owns the policy, the death benefit is included in their estate under IRC §2042.
If the ILIT owns it, the proceeds are excluded.
This can save up to 40% estate tax on large policies.
4. Creditor Protection for Beneficiaries
Because the ILIT owns the policy and if the trust has spendthrift language:
Grantor’s creditors cannot reach the policy
Beneficiaries’ creditors cannot reach the proceeds. This is especially valuable for:
- Minors
- Beneficiaries with unstable marriages
- High‑risk professions
5. Can Provide Liquidity to Pay Estate Taxes
Even though the ILIT is outside the estate, it can:
- Loan money to the estate
- Purchase assets from the estate
This gives the estate liquidity without forcing a fire sale of real estate or business interests.
6. Multi‑Generational Planning
An ILIT can be drafted as a discretionary trust for multiple generations. This allows the death benefit to seed a long‑term family wealth structure.
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