Irrevocable Life Insurance Trusts: How an ILIT Protects Your Family’s Payout

Most people think of life insurance as a simple deal. You pay the premiums, and when you die, your family receives a check. But as your home, retirement accounts, business, and investments grow, a question comes up that many families never consider: who actually owns the policy? That answer can change how much of the money your family keeps, and how safely it reaches the people you love.

If you own the policy yourself, the death benefit can be counted as part of your estate for federal estate tax purposes. It can also land in the hands of a young or inexperienced heir with no protections in place. An irrevocable life insurance trust, usually called an ILIT, is a common way to address both concerns. This guide explains what an ILIT is, who might want one under the 2026 tax rules, how it gets funded, and what you give up in exchange.

A quick note first. Western Pacific Insurance is an insurance agency, not a law firm. An ILIT is a legal document that an estate planning attorney must draft, and tax questions belong with your attorney and your CPA. Our part is the insurance side: designing the policy, shopping it, and placing it so it fits the trust your attorney builds. Nothing on this page is legal or tax advice.

What an irrevocable life insurance trust is

An ILIT is a trust whose job is to own one or more life insurance policies and receive the death benefit when you pass away. Three roles make it work:

• You are the grantor, the person who creates the trust.
• The trustee is the person or institution you choose to manage it. The trustee owns the policy, pays the premiums, and later distributes the money.
• The beneficiaries, often a spouse, children, or grandchildren, receive the money under the rules written into the trust.

The word that matters most is irrevocable. After the trust is signed, you generally cannot change its terms, take the policy back, or name yourself as a beneficiary. Giving up that control is exactly what makes the arrangement work, and it is also the biggest trade-off you accept.

Why ownership matters: the estate tax link

Under Internal Revenue Code section 2042, life insurance proceeds are included in your taxable estate if you held any “incidents of ownership” in the policy when you died. In plain terms, that means rights such as changing the beneficiary, borrowing against the policy, or cashing it in. If you own a large policy on your own life, the full death benefit can be counted toward your estate.

When an ILIT owns the policy from the beginning, those rights belong to the trustee instead of you. If everything is set up correctly, the death benefit is paid to the trust outside your taxable estate. The trustee can then use it to support your family or to give your estate the cash it needs.

The 2026 federal estate tax exemption

The One Big Beautiful Bill Act, signed July 4, 2025, raised the federal basic exclusion amount to $15,000,000 per person for 2026, according to the IRS. It will be adjusted for inflation starting in 2027. The law also removed the scheduled sunset that had been set to take effect at the end of 2025. A married couple can often shelter up to $30,000,000 combined when the surviving spouse uses the first spouse’s unused exemption, a choice called portability that requires a timely filed estate tax return. Amounts above the exemption can face a top federal estate tax rate of 40 percent.

Most families will not owe federal estate tax under current law. Still, Congress can change the rules, and families with fast-growing businesses, real estate, or concentrated stock can cross the line sooner than they expect. A large policy owned outright can be the very thing that pushes an estate over it.

Who should consider an ILIT

Estate tax is only one reason families use these trusts. An ILIT may be worth discussing with your attorney if any of the following describe you:

• Your estate, including the death benefit of your life insurance, is near or above the federal exemption, or could be someday.
• Your heirs will need cash to pay estate tax or settle debts without being forced to sell a family business, ranch, or rental property at a bad time.
• You want a trustee to manage money for minor children, a child with special needs, or an adult child who is not ready to handle a large sum.
• You have a blended family and want to make sure children from an earlier marriage are provided for.
• You own a business and the policy is part of a succession or equalization plan. Our guide to key person and buy-sell life insurance covers the business side.

If none of these fit, a simple beneficiary designation may be all you need. An ILIT adds cost and paperwork, so it should be solving a real problem for your family.

The three-year rule for existing policies

Suppose you already own a policy and want to move it into an ILIT. Internal Revenue Code section 2035 pulls the death benefit back into your estate if you die within three years of the transfer. The transfer can also count as a taxable gift based on the policy’s value, which your CPA may need to report.

For this reason, many attorneys prefer having the trustee apply for and own a brand new policy from day one, which generally avoids the three-year rule. If your health makes new coverage hard to get, moving an existing policy can still be the right call. Your attorney can walk you through the options.

How premiums are paid: gifts and Crummey notices

A new ILIT usually has no money of its own. So you make gifts to the trust, and the trustee uses those gifts to pay the premiums. To help these gifts qualify for the federal annual gift tax exclusion, which the IRS lists as $19,000 per recipient for 2026, most ILITs give each beneficiary a temporary right to withdraw their share of each gift. The trustee sends a written notice, commonly called a Crummey notice after the 1968 court case that approved the approach.

In practice, beneficiaries almost always let the withdrawal window pass, and the trustee then pays the premium. Each beneficiary with a withdrawal right can count as a separate recipient, so a trust with several children or grandchildren can support larger premiums. Your attorney will set the details. Two common mistakes can create tax problems: skipping the notices and paying premiums straight from your own account.

Gifts larger than the annual exclusion generally use part of your lifetime exemption and may require a gift tax return. Your CPA should keep track of this.

Second-to-die policies for married couples

Assets left to a surviving spouse who is a U.S. citizen generally qualify for the unlimited marital deduction. As a result, estate tax for married couples is often due only after the second spouse dies. A survivorship policy, also called second-to-die life insurance, covers both spouses and pays only after the second death, which matches that timing.

Survivorship coverage is often priced lower than two separate permanent policies, and it can sometimes be issued even when one spouse has health issues. The trade-off is that it pays nothing at the first death. Families who need income protection at that point often keep separate coverage as well.

What kind of policy goes in the trust

An ILIT can own term or permanent life insurance. If your family will need cash whenever you die, permanent coverage such as guaranteed universal life or whole life is a common choice. If your goal is to protect young children for a set number of years, term coverage owned by the trust can work well. Our guide to term versus permanent life insurance explains the differences, and our individual life insurance page covers the policies we place.

Underwriting works the same way it does outside a trust. The insured answers the health questions, and the trustee signs the application on behalf of the trust, which is named as both owner and beneficiary.

Choosing a trustee

The trustee has real work to do. That includes owning the policy, sending notices on time, paying premiums, keeping records, and eventually collecting and distributing the death benefit. Families usually choose from three options:

• A trusted family member or friend, who costs little but must be organized and reliable for decades.
• A professional or corporate trustee, such as a bank or trust company, which charges fees but offers continuity and experience.
• A combination, with a professional serving alongside or after a family member.

Your attorney will advise who can serve, because giving the wrong powers to the wrong person can pull the policy back into your estate.

Costs and trade-offs

An ILIT is powerful, but it is neither free nor flexible. Before moving forward, weigh these costs:

• Attorney fees to draft the trust, which vary by firm and complexity, plus any professional trustee fees.
• Annual administration, including gifts, notices, premium payments, and records, for every year the policy is in force.
• Loss of control. You cannot borrow from the policy, cancel it, or change beneficiaries yourself.
• Limited room to change course if your family or the law changes. Ask your attorney what flexibility is possible.
• Premium commitments. If the gifts stop, a permanent policy can lapse, so the coverage should fit a budget you can sustain.

Keep in mind that a revocable living trust holding your home is a different document entirely. If you have one, read our guide to trust homeowners insurance.

How Western Pacific Insurance helps

We work alongside your attorney and CPA. We help size the coverage, compare single life and survivorship designs from multiple carriers, coordinate underwriting, and make sure the trustee is listed correctly as owner and beneficiary. For larger households, our high net worth insurance page shows how life coverage fits together with home, auto, and umbrella protection.

Local guides and next steps

State law affects how trusts are written and how marital property is treated. Read our local pages for Henderson, Phoenix, San Diego, and Lehi.

Western Pacific Insurance is based in Henderson, Nevada, and works with families across Nevada, Arizona, California, and Utah. Bring a summary of your current life insurance and your goals for the trust, then call 702-932-3105 or request a quote online.