What is an Irrevocable Life Insurance Trust (ILIT)?


First, congratulations! If you are interested in an Irrevocable Life Insurance Trust (usually referred to as an ILIT), then you have likely done well financially and are interested in minimizing your estate tax liability… and an ILIT can help!

The Two Ingredients of an ILIT

Like most estate planning instruments, the name of the instrument tells you quite a bit. An ILIT is an irrevocable trust – that means that once signed, most of the terms of the trust are set and cannot be changed. This is where you need an experienced estate planning attorney: to draft the irrevocable trust and ensure that it is funded correctly.  Further, each year, the premium payments must follow certain procedures in order to ensure that beneficiaries receive proper notice (so called “Crummey notices”). Correctly setting up and administering the ILIT is ingredient #1.

Ingredient #2 of an ILIT is choosing a suitable life insurance policy. This is where your life insurance professional comes in.  The life insurance policy is on your life, or you and your spouse’s lives, in a second to die policy. The life insurance policy is taken out on the individual(s) who have the money.

The key is that  the individuals who have the money are the insureds, while the owner of the policy and beneficiary of the policy is your newly created ILIT trust. Thus, when you (the insured) dies, the death proceeds of the life insurance held in the ILIT will be paid to the ILIT (and its named beneficiaries) and not included in your estate.


The beauty of an Irrevocable Life Insurance Trust is that it makes it possible to transfer life insurance proceeds to your beneficiaries without having to pay estate tax on those proceeds.

When set up correctly, the payments to the ILIT will be the same as the annual exclusion amount allowable to each of the beneficiaries of the trust (in 2016: $14,000 per person, per year). The result is that the annual premium payments will not count against the insured’s unified credit, which minimizes the insured’s estate tax.

Clients of mine have used ILITs to save hundreds of thousands of dollars in estate tax. If you are interested in minimizing your estate tax, take a few minutes and research an “ILIT”. Then come in and we’ll discuss what we can do together.


Who uses an ILIT to reduce their estate taxes? Those in the know – the rich and powerful. For example. Bloomberg Business reports that Bill and Hillary Clinton have set up multiple ILITs, first in 1996 and again in 2010. [June 17, 2014 article, “Wealthy Clintons Use Trusts to Limit Estate Tax They Back”, http://www.bloomberg.com/news/articles/2014-06-17/wealthy-clintons-use-trusts-to-limit-estate-tax-they-back]

As David Scott Sloan, an attorney quoted in the Bloomberg Business article states, “[This] move could save the Clintons hundreds of thousands of dollars in estate taxes…  The goal is really be thoughtful and try to build up the nontaxable estate, and that’s really what this is… You’re creating things that are going to be on the nontaxable side of the balance sheet when they die.”

If the 42nd President of the United States is using an ILIT to reduce his taxable estate, I suggest you consider doing the same. An ILIT is one of the first estate planning instruments to consider for people who know they will be subject to the estate tax.