Life insurance can help provide for family members and make cash available after a death. In larger estates, how the policy is owned can also affect estate taxes.
Many people are surprised to learn that a life insurance death benefit can be included in their taxable estate. If you own the policy, or hold certain rights over it such as the power to change the beneficiary, the full death benefit is counted as part of your estate when you die. For a family already near or above the estate tax exemption, that can mean a substantial share of the proceeds goes to tax.
What an ILIT is
An irrevocable life insurance trust, or ILIT, is a trust created to own one or more life insurance policies. Because the trust, and not the insured person, owns the policy, the death benefit is generally kept out of the insured's taxable estate. The trust document also governs how the proceeds are managed and distributed, which a simple beneficiary designation cannot do.
How it works, step by step
- 1. The trust is created. An estate attorney drafts the trust. You name a trustee, who must be someone other than you, and the beneficiaries.
- 2. The trust acquires a policy. Ideally the trustee applies for and purchases a new policy, so that you never own it.
- 3. You fund the premiums. Each year you make gifts of cash to the trust, and the trustee pays the premium.
- 4. Beneficiaries are notified. To allow those gifts to qualify for the annual gift tax exclusion, beneficiaries are given a temporary right to withdraw their share, and the trustee sends written notice. These are often called Crummey notices.
- 5. At death, the trust receives the proceeds. The trustee holds or distributes them according to the trust's terms.
Transferring an existing policy
An existing policy can be transferred into an ILIT, but if the insured dies within three years of the transfer, the death benefit is brought back into the taxable estate. Transferring a policy with cash value is also a gift that must be valued. Having the trust purchase a new policy avoids the three-year issue where that is possible.
What families use an ILIT for
- Liquidity. Estate tax is generally due nine months after death. When an estate consists largely of a business, real estate or other illiquid assets, insurance proceeds held in trust can supply cash, for example by lending to the estate or purchasing assets from it, so that nothing has to be sold under pressure.
- Equalizing inheritances. When one child will receive the family business, insurance can provide comparable value to the others.
- Protecting and directing the proceeds. The trust can hold assets for a spouse, children or grandchildren under terms you set.
- Second-to-die coverage. Married couples often use a survivorship policy, which pays at the second death, when estate tax is typically due.
Considerations
- It is irrevocable. You give up ownership and control of the policy, and the trust's terms generally cannot be changed by you.
- Administration matters. Gifts, notices and premium payments need to follow the correct sequence every year. Lapses can undermine the tax result.
- It is a long-term commitment. The policy must be funded and monitored for decades. Policy performance, premium requirements and the insurer's financial strength should be reviewed periodically.
- Not every family needs one. With the federal exemption at its current level, an ILIT is most relevant for larger estates, for residents of states with their own estate tax, and where control over the proceeds matters as much as tax.
Life insurance guarantees depend on the claims-paying ability of the issuing insurance company. An ILIT should be designed by an estate attorney, in coordination with your wealth advisor, CPA and insurance professional.
Common questions
What is an ILIT?
An irrevocable life insurance trust, or ILIT, is a trust created to own one or more life insurance policies. Because the trust, and not the insured person, owns the policy, the death benefit is generally kept out of the insured’s taxable estate.
Is life insurance included in my taxable estate?
It can be. If you own the policy, or hold certain rights over it such as the power to change the beneficiary, the full death benefit is counted as part of your estate when you die.
Can I transfer an existing policy into an ILIT?
Yes, but if the insured dies within three years of the transfer, the death benefit is brought back into the taxable estate.
Key figures (as of November 12, 2026)
- Three-year rule: a policy transferred by the insured within three years of death is included in the taxable estate.
- Annual gift tax exclusion, commonly used to fund premiums: $19,000 per beneficiary for 2026 and $20,000 for 2027.
- Federal estate tax basic exclusion: $15,000,000 per person for 2026 and $15,480,000 for 2027; top rate 40%.
References
- Internal Revenue Code Sections 101(a) (income tax exclusion), 2035 (three-year rule) and 2042 (incidents of ownership).
- IRS news release IR-2026-133 and Revenue Procedure 2026-35 (November 5, 2026).
- Background reading: Glenmede, article on irrevocable life insurance trusts (glenmede.com); Carson Wealth, 'What Is an Irrevocable Life Insurance Trust (ILIT)?' (carsonwealth.com).
Securities offered through Bolton Global Capital, Inc., 579 Main St., Bolton, MA. Member FINRA, SIPC 978-779-5361. Advisory services offered through Bolton Global Asset Management, a SEC registered investment advisor.
This material is provided by NewEra Wealth Advisors for general informational and educational purposes only. It is not intended as, and should not be relied upon as, investment, tax or legal advice, or as a recommendation for any individual. Tax laws and regulations are complex, subject to change, and apply differently depending on individual circumstances. Figures cited are believed to be accurate as of the date shown and may change. Please consult your tax and legal advisors before taking any action. NewEra Wealth Advisors does not provide tax or legal advice.
