Using an Irrevocable Life Insurance Trust in Estate Planning

An irrevocable life insurance trust (ILIT) is an estate planning tool commonly used by individuals seeking to leverage life insurance for maximum benefit while minimizing exposure to estate, gift and generation-skipping taxes. 

An ILIT is a legal entity that owns your life insurance policy. Your appoint a trustee (such as a family member, friend or a professional fiduciary) to manage the trust according to specified terms. You fund the ILIT by making annual contributions, which the trustee uses to pay premiums on the insurance policy. When you pass away, the policy’s death benefit is paid directly to the trust and then distributed to your chosen beneficiaries in accordance with your instructions.

These are the major strategic advantages of creating an ILIT:

• Minimizing estate taxes — Under ordinary circumstances, your life insurance policy’s death benefit is considered part of your estate for tax purposes. For individuals with substantial assets, this could markedly increase federal estate taxes. With an ILIT, because the trust is the owner and beneficiary of the policy, the proceeds bypass your estate and are not subject to taxation.
• Sheltering from gift taxes — Premiums you contribute to the ILIT are considered gifts, but they can often qualify for the annual federal gift tax exclusion ($19,000 per recipient as of 2025). Many ILITs provide for “Crummey powers.” These allow beneficiaries to temporarily withdraw contributions, thereby qualifying the premiums as present interest gifts eligible for exclusion.
• Asset protection — Since an ILIT is irrevocable, assets in the trust are shielded from claims resulting from lawsuits, divorces or creditor actions against you or your beneficiaries. This makes ILITs appealing to individuals with substantial wealth or in high-risk professions.
• Estate liquidity — Life insurance proceeds paid out to an ILIT can offer much-needed liquidity to an estate, helping heirs pay taxes, settlement costs or buyout interests in a family business.
• Distribution control — An ILIT allows you to dictate exactly how and when your beneficiaries receive distributions. You can direct the trustee to dole out funds over time, upon beneficiaries reaching certain ages or for specific purposes like education, home purchases or healthcare. This control can prevent reckless spending and ensure that your legacy has a lasting positive impact.
• Preserving government benefits — For families with special needs beneficiaries, an ILIT that is structured properly can provide support without disqualifying those individuals from means-tested government assistance such as SSI or Medicaid.

A drawback of an ILIT is that it is irrevocable. You cannot change the terms, access the assets or reclaim the policy once it’s transferred. In addition, if you transfer an existing life insurance policy to an ILIT and die within three years of the transfer, the IRS may include the death benefit in your taxable estate. An experienced trust planning attorney can ensure the proper setup and administration of an ILIT that are critical to achieving your goals and avoiding legal or tax pitfalls.

Otlewski & Maloney, P.C. in Rochester Hills, Michigan can assist you in making effective use of trusts as part of your estate planning, call at 248-759-5641 or contact us online to arrange a consultation.