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Irrevocable Life Insurance Trust (ILIT) Explained

An irrevocable life insurance trust, or ILIT, is a trust built to own a life insurance policy so the death benefit stays out of your taxable estate. A policy you own yourself is counted in your estate when you die; an ILIT owns it instead, which can keep a large payout from adding estate tax, while still delivering the money to your family.

Settled Estate cover: irrevocable life insurance trust
By Settled Estate Editorial Team

The Short Answer

Life insurance feels like it should be tax-free, and the payout is income-tax-free to your beneficiaries. The catch is estate tax: a policy you own is part of your taxable estate. For an estate large enough to owe estate tax, an ILIT is the standard fix. It is an irrevocable trust that owns the policy so the benefit lands outside your estate.

How It Works

  1. You create the ILIT, and the trust applies for and owns a life insurance policy on your life (or transfers in an existing one).
  2. The trust is both the owner and the beneficiary of the policy, so you no longer own it.
  3. You gift money to the trust each year, and the trustee uses it to pay the premiums.
  4. When you die, the insurer pays the death benefit to the trust, outside your estate, and the trustee distributes it to your family under the trust’s terms.

A common use is liquidity: the tax-free, estate-tax-free payout gives your family cash to pay estate taxes and debts without having to sell a home or a business quickly.

Crummey Letters and the 3-Year Rule

Two technical rules make an ILIT work, and both are reasons it needs a professional:

  • Crummey letters. To keep premium gifts from using up your lifetime exemption, the trust sends beneficiaries a short-lived right to withdraw each gift (a Crummey notice). That withdrawal right qualifies the gift for the annual gift-tax exclusion; beneficiaries usually decline, and the trustee pays the premium.
  • The three-year rule. If you move an existing policy into the ILIT, you must survive three years for the payout to stay out of your estate. Die within three years and it is pulled back in. Having the ILIT buy a new policy avoids this wait.

Who Needs One

An ILIT is for people whose estate is large enough to face federal or state estate tax and who carry (or want) a large life insurance policy. If your estate is below the estate-tax exemption, the estate-tax reason to use an ILIT may not apply, and simpler planning is usually enough. Because the rules are exacting and the trust is permanent, an ILIT is set up with a financial advisor and an estate attorney, using your current numbers.

Frequently Asked Questions

What is an irrevocable life insurance trust?
An irrevocable life insurance trust (ILIT) is an irrevocable trust created to own a life insurance policy. Because the trust, not you, owns the policy, the death benefit is not counted in your taxable estate when you die. For a large policy on a large estate, that can keep hundreds of thousands of dollars of estate tax off the table, while still delivering the payout to your family through the trust.
Why put life insurance in a trust?
A life insurance policy you own personally is included in your estate for estate-tax purposes, even though the payout goes to your beneficiaries. If your estate is large enough to owe estate tax, that inclusion can add a large tax. An ILIT removes the policy from your estate, and it also provides liquidity: the payout can be used to pay estate taxes or debts so your family does not have to sell the house or the business to cover them.
What is a Crummey letter?
To pay the policy premiums, you gift money to the ILIT. A Crummey letter is a notice sent to the trust beneficiaries giving them a short window to withdraw that gift. That withdrawal right is what lets the gift qualify for the annual gift-tax exclusion, so it does not use up your lifetime exemption. Beneficiaries typically decline to withdraw, and the trustee then uses the money to pay the premium.
What is the three-year rule for an ILIT?
If you transfer a policy you already own into an ILIT, you must live at least three years after the transfer for the payout to be excluded from your estate. If you die within three years, the death benefit is pulled back into your taxable estate. That rule is why many people have the ILIT buy a brand-new policy from the start, rather than transferring an existing one, which avoids the three-year wait entirely.

Information current as of July 16, 2026

Settled Estate is not a law firm, and this content is for informational purposes only and does not constitute legal advice. Probate laws and procedures in your state can change. Consult with a qualified attorney for advice specific to your situation. Full disclaimer.