If you own a life insurance policy at death, the death benefit is included in your gross estate for federal estate tax purposes — even though your beneficiaries receive it income-tax-free. For large policies, this means a $2M death benefit in a $15M estate could trigger $800,000 in estate taxes on money that was supposed to go to your heirs. An ILIT solves this by removing the policy from your ownership entirely.
ILIT is established by an attorney
An irrevocable trust is drafted with the life insurance policy as its primary asset. You are the grantor — you fund the trust but cannot control it. A trustee (not you, and typically not your spouse) manages the trust and owns the policy.
Trust applies for or receives the life insurance policy
The ILIT applies for and owns the new policy from inception — this avoids the 3-year lookback rule. If an existing policy is transferred into an ILIT, the 3-year rule applies — if you die within 3 years of the transfer, the death benefit is still included in your estate.
You make annual gifts to the trust — Crummey powers
You cannot pay premiums directly — that would be a contribution to an irrevocable trust subject to gift tax. Instead, you make annual gifts to the trust, and beneficiaries receive "Crummey notices" giving them a 30-day window to withdraw the funds. Most beneficiaries do not withdraw, allowing the trustee to pay the premium. Each gift can use your annual exclusion ($18,000 per beneficiary in 2024).
Death benefit paid to trust — distributed to heirs estate-tax-free
At your death, the death benefit is paid to the ILIT — completely outside your taxable estate. The trustee distributes proceeds to beneficiaries per the trust terms, with no income tax and no estate tax. The full death benefit reaches your heirs.
The 2026 estate tax cliff — fund your ILIT now
Current estate tax exemptions are $13.61M per individual and $27.22M per married couple. These are scheduled to roughly halve when TCJA sunsets in 2026. An ILIT established and funded before the sunset locks in the higher exemption for those gifts permanently — gifts made today at the higher exclusion cannot be clawed back. For estates that will exceed $7M per person after 2026, ILIT funding is urgent.
Crummey powers — making the annual gift strategy work
Why they exist: To qualify for the annual gift tax exclusion ($18,000 per beneficiary in 2024), a gift must be of a "present interest" — meaning the recipient must have the right to use it now. A contribution to an irrevocable trust is normally a future interest gift and does not qualify.
How they work: Crummey powers give each trust beneficiary the right to withdraw their share of any contribution made to the trust within 30 days of receiving notice. If they don't withdraw (and they typically don't), the trustee can use the funds to pay the insurance premium.
The result: Each annual gift qualifies for the gift tax annual exclusion — up to $18,000 per beneficiary per year in 2024 — allowing substantial premium payments without using your lifetime exemption.
ILIT + RMDs — Ed Slott's IRA rescue strategy
Ed Slott's most powerful legacy planning recommendation: use annual RMDs — after paying income tax on them — to fund premiums in an ILIT-owned life insurance policy. You convert taxable, forced IRA distributions into a completely tax-free, estate-tax-free death benefit for your heirs. The tax paid on the RMD is the "cost" of converting a heavily taxed inherited IRA into a clean, tax-free legacy. For large IRAs, this strategy can transfer significantly more wealth to heirs than leaving the IRA untouched.