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Irrevocable Life Insurance Trust: What it is & its Benefits Thumbnail

Irrevocable Life Insurance Trust: What it is & its Benefits

By: Larissa A. Mehlfelder, CFP®, CAIA, BFA™

When you own life insurance, whether it's a temporary or permanent policy, the death benefit is included in your taxable gross estate. Alternatively, if the policy is owned by an Irrevocable Life Insurance Trust (ILIT), the death benefit proceeds are not included in your gross estate and therefore are not subject to state and federal estate taxation. For some people, this may not matter if their estate is below estate tax exemption levels. As of 2022, the federal exemption level is over $12 million per person or $24 million for married couples. However, that is currently scheduled to sunset in 2025 and be cut in half to over $6 million per person, or $12 million for married couples. Different states have varied estate tax exemption levels as well. 

While estate taxation may not be an issue for your family today, it could be down the road as tax policies change. You may want to consider incorporating an ILIT into your financial plan to help offset future estate taxes and allow for more efficient wealth transfer to your heirs. 

What Is an Irrevocable Life Insurance Trust (ILIT)?

An ILIT is established during your lifetime by purchasing a life insurance policy or transferring an existing policy into a trust, which becomes the policy’s owner. Note that if you go the route of transferring a policy, there is a three year look-back rule. This means that if you were to die within three years of transferring the policy into the trust, your policy will be pulled back into your estate upon your death. You will then name beneficiaries of the trust, such as your spouse, children, grandchildren, or their spouses. Upon your death, the ILIT will receive the life insurance policy’s death benefit and distribute proceeds to the named beneficiaries.

You must also name a trustee when setting up the ILIT — you can’t serve as the trustee yourself. This can be a family member, a close friend, an attorney, or someone else you trust. Choose your trustee carefully because this person will be responsible for managing the trust while you are alive as well as distributing the death benefit proceeds and trust assets after you pass away. 

You can give your trustee authority to control when beneficiaries receive death benefit proceeds. For example, they can be distributed when beneficiaries reach the age of majority, graduate from college or reach some other life milestone, like getting married and starting a family. Alternatively, proceeds can just be paid out to your beneficiaries in full upon your death. 


The biggest drawback of an ILIT is that, as the name implies, it is irrevocable. In other words, no changes can be made once the trust is finalized. Any assets that you, as the grantor, place in the trust no longer belong to you and you have no control over them. 

Funding Alternatives for ILITs

ILITs can be either funded or unfunded:

Funded Trust:

In a funded trust, you will transfer other property into the trust in addition to life insurance — this may be cash, securities or other assets that will be used to pay future life insurance premiums.

If the ILIT is funded and those assets are invested and generating taxable income, it is possible that the income would be taxable to you as the grantor instead of taxable to the trust itself. Investors may choose this approach as a way to reduce their taxable estate further. 

Unfunded Trust:

In an unfunded trust, there is no other property in the trust besides the life insurance policy itself. Therefore, future annual gifts must be made from you, the grantor, to help pay future life insurance premiums. 

Crummey Powers

Since the ILIT owns the life insurance policy, it will make the premium payments each month or year. As the grantor, you will deposit money into the trust to make premium payments. These funds are classified as gifts to the beneficiaries. For them to be considered tax-free gifts that count toward the $16,000 annual gift tax exclusion (as of 2022), beneficiaries must receive a letter giving them what’s known as “Crummey powers.”

This letter will inform the beneficiaries that a gift has been made to the trust and they have the immediate and unrestricted right to withdraw the money within a certain time period (usually 30 days). The Crummey letter essentially changes what would be a future gift into a present gift by giving the beneficiary an immediate and present interest in it. This allows the gift to qualify under the gift tax exemption to the extent that it’s less than $16,000 per beneficiary.

The idea, of course, is that beneficiaries will not withdraw these funds but that they remain in the trust to pay the life insurance premiums. However, a Crummey letter must be sent telling the beneficiary that they have the right to withdraw the money for the money to count toward the annual gift tax exclusion.

Additional Benefits of an ILIT

An ILIT offers other potential benefits in addition to eliminating or reducing estate taxes:

  • Cash is available to help pay estate settlement costs and meet other liquidity needs.
  • Probate costs can be avoided on life insurance proceeds and any other assets held in the trust.
  • Trust provisions are a not a matter of public record — they are private and confidential.
  • Assets in the trust are shielded from creditors’ claims at the time of the grantor’s death.
  • Income is provided to heirs and survivors, giving them greater financial security.

How A Financial Advisor Can Help

A Simon Quick advisor can answer your questions about irrevocable life insurance trusts and help you decide if establishing one makes sense for you. To learn more, call us at (973) 525-1000 or send an email to info@simonquickadvisors.com.

About Larissa Mehlfelder

Ms. Mehlfelder joined Simon Quick in June 2009 with prior experience in wealth management and investing. As a Client Advisor based in Morristown, NJ, she works with clients in developing and implementing their financial planning objectives. Throughout her wealth management career at other boutique financial advisory firms, she has gained valuable experience monitoring client investments and spearheading strategic marketing efforts. Ms. Mehlfelder earned a BS degree in Finance with a minor in Mathematics from The College of New Jersey where she maintained Dean’s List status. She completed Fairleigh Dickinson University's Program for Financial Planners in 2011 and became a CERTIFIED FINANCIAL PLANNER™ practitioner in 2012. She earned her CAIA Charter in March of 2014 and is a member of the Chartered Alternative Investment Analyst Association. To learn more about Larissa visit her LinkedIn


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