The short answer
An irrevocable life insurance trust (ILIT) owns a life insurance policy on your life and receives the death benefit. Because you don’t own the policy, the proceeds are generally kept out of your taxable estate. In exchange, you give up control: the trust is irrevocable and is run by a trustee.
| You own the policy | An ILIT owns the policy | |
|---|---|---|
| Income tax on the death benefit | Generally none | Generally none |
| Counts toward federal estate tax | Yes | Generally no |
| Control of the proceeds after death | Paid outright to beneficiaries | Managed under the trust’s terms |
| Can you change it later? | Yes | Very limited |
Federal estate tax exemption: $15 million per person, $30 million per married couple, in 2026. Simplified; trust terms and facts control the result.
How an ILIT works, step by step
- An attorney drafts the trust. You sign an irrevocable trust naming a trustee and beneficiaries, and the trust gets its own tax ID.
- The trust buys the policy. The trustee applies for insurance on your life, with the trust as owner and beneficiary. Married couples often use a second-to-die (survivorship) policy, because estate tax is usually due at the second death.
- You fund the premiums with gifts. You give cash to the trust each year, and the trustee pays the premium.
- Beneficiaries get Crummey notices. Each gift gives beneficiaries a short window to withdraw it, which lets the gift qualify for the $19,000-per-beneficiary annual exclusion in 2026. They normally let the window lapse.
- At death, the trustee collects the benefit and uses it under the trust’s terms: lending to or buying assets from the estate to provide cash for taxes, supporting a surviving spouse, or holding money for children over time.
The three-year rule
If you move a policy you already own into an ILIT and die within three years, the death benefit is pulled back into your estate. Where health allows, having the trust buy a new policy from the start avoids the problem. For an existing policy, ask your attorney about alternatives such as selling it to the trust, which has its own tax rules.
A worked example
A married couple in their late 60s has an estate of $40 million, including a family business and real estate. Their combined federal exemption in 2026 is $30 million, so about $10 million would be taxable at the second death. They want their three children to inherit the business without selling it to pay the tax.
| Couple owns $5M policy | ILIT owns $5M policy | |
|---|---|---|
| Taxable estate above the $30M exemption | $15,000,000 | $10,000,000 |
| Federal estate tax at 40% | $6,000,000 | $4,000,000 |
| Cash from the policy available to heirs | $5,000,000 | $5,000,000 |
Hypothetical and simplified; assumes the 2026 exemption, a flat 40% rate above it, and no state estate tax. The exemption is indexed for inflation in later years.
Owned personally, the policy would add $2 million of estate tax, taking much of its own benefit. Inside the ILIT, the full $5 million is available to provide cash for the $4 million bill, so the business does not have to be sold. With two parents and three children, the couple can give up to $114,000 a year to the trust within the 2026 annual exclusions to cover premiums.
Is your life insurance counted in your estate?
We’ll review who owns your policies, estimate the estate tax exposure, and coordinate with your estate attorney on whether an ILIT, or a simpler approach, fits.
Request a review →When an ILIT makes sense, and when it doesn’t
Often worth considering
- Estates near or above the federal exemption, including expected growth
- Illiquid estates: a business, farm, or real estate
- Blended families or second marriages
- Beneficiaries who are young, have special needs, or face creditor or divorce risk
Often unnecessary
- Estates well below the exemption with no control concerns
- Term insurance meant only to replace income for a few years
- Families who want to keep the flexibility to change beneficiaries or cash in the policy
Costs and ongoing administration
- Legal fees to draft the trust, plus any later amendments allowed under state law.
- Annual administration: a trust bank account, Crummey notices for each gift, premium payments, and records the trustee should keep.
- Gift tax returns (Form 709) when gifts exceed the annual exclusion or when you allocate generation-skipping transfer tax exemption to the trust.
- The insurance itself. Premiums depend on age, health, policy type, and guarantees. Compare guaranteed and non-guaranteed illustrations, not just the premium.
An ILIT is only as good as its administration. Missed Crummey notices or premiums paid directly by the insured can weaken the plan.
Pennsylvania families
Life insurance proceeds are generally exempt from Pennsylvania inheritance tax even without a trust. Because policies already escape the state tax, the reasons to use an ILIT in Pennsylvania are the federal estate tax, control of the proceeds, and protecting beneficiaries. Proceeds can also give heirs the cash to pay Pennsylvania inheritance tax on other assets within three months and capture the 5% discount.
How Rubiq helps
We are not a law firm and do not draft trusts. We model your estate tax exposure, review existing policies and ownership, coordinate with your estate attorney and CPA, and help the trustee keep the premium and gift schedule on track. When a review shows a need for coverage, our advisors can help you obtain it through LPL Financial and may earn a commission if you buy a policy through them; any compensation is disclosed before you decide, and you are free to buy coverage from any agent you choose. See our insurance review and estate planning pages, and our guides to revocable vs. irrevocable trusts and the gift tax.
Frequently asked questions
What is an irrevocable life insurance trust (ILIT)?
An ILIT is a trust that owns a life insurance policy on your life and is named as its beneficiary. Because you do not own the policy, the death benefit is generally not included in your taxable estate for federal estate tax purposes. The trustee collects the proceeds at your death and manages or distributes them under the trust’s terms, for example to pay estate taxes, provide for a spouse, or hold money for children.
How are premiums paid in an ILIT?
You typically give cash to the trust and the trustee pays the premium. To make those gifts qualify for the annual gift tax exclusion, $19,000 per beneficiary in 2026, the trust usually gives beneficiaries a temporary right to withdraw each gift, known as a Crummey power. Beneficiaries receive notice and generally let the right lapse so the trustee can pay the premium.
What is the three-year rule for life insurance trusts?
If you transfer a policy you already own into an ILIT and die within three years, the death benefit is pulled back into your taxable estate. Having the trust apply for and buy a new policy from the start avoids the three-year rule, although health and insurability affect whether that is practical.
Do I need an ILIT if my estate is below the federal exemption?
Often not for tax reasons. The federal estate tax exemption is $15 million per person in 2026, or $30 million for a married couple. Families below that may still use an ILIT to control how proceeds are used, protect them from a beneficiary’s creditors or divorce, provide for a blended family or a beneficiary with special needs, or plan for future growth in the estate.
Can I be the trustee of my own ILIT?
Generally no. If you, the insured, have control over the policy, the death benefit can be included in your estate. Families usually name an adult child, another relative, a trusted friend, or a professional trustee. The trust should be drafted by an estate planning attorney.
Is life insurance subject to Pennsylvania inheritance tax?
No. Life insurance proceeds paid because of the insured’s death are generally exempt from Pennsylvania inheritance tax whether or not they are held in a trust. For Pennsylvania families, an ILIT is mainly about the federal estate tax, control of the proceeds, and protecting beneficiaries.