Irrevocable Life Insurance Trusts (ILITs): The Foundation of Advanced Wealth Transfer

An irrevocable life insurance trust, commonly called an ILIT, is one of the most widely used structures in advanced wealth transfer planning. If you are reading about split dollar, premium financing, or estate liquidity strategies, you will see the ILIT mentioned again and again. This article walks through the basics in plain language. It is educational only.

What an ILIT is

An ILIT is a trust created by a grantor, typically funded with cash gifts that the trustee uses to pay premiums on a life insurance policy. The trust owns the policy, and the trust is the beneficiary. Because the grantor does not own the policy and gives up control over it, the death benefit is generally not included in the grantor's taxable estate.

Why families use ILITs

Common reasons to use an ILIT include:

• Estate tax efficiency. Keeping the death benefit outside the taxable estate.
• Control over distributions. The trust document can dictate how and when heirs receive proceeds.
• Creditor and divorce protection. Trust assets are usually protected from beneficiaries' creditors and ex-spouses.
• Coordination. ILITs work alongside business succession plans, charitable goals, and other trusts.

How premiums get paid

Premiums are usually funded through annual gifts to the trust. The trustee sends "Crummey" notices to beneficiaries, giving them a temporary right to withdraw the gift. After the withdrawal window closes, the trustee uses the funds to pay the premium. This sequencing is what allows the gifts to qualify for the annual gift tax exclusion in many cases.

The annual administration of an ILIT is not optional. Skipping Crummey notices or commingling funds can undermine the entire plan.

Where ILITs sit in advanced strategies

Most advanced wealth transfer arrangements rely on an ILIT as the policy owner:

1. Intergenerational split dollar. A senior generation or their trust advances premiums to a junior generation's ILIT.
2. Premium financing. A lender advances premiums to fund a policy owned by an ILIT.
3. Sale to a defective grantor trust. Assets are sold to a grantor trust that may also hold life insurance.
4. Business succession planning. An ILIT may own a policy used for buy-sell funding or estate equalization.

In each case, the ILIT is the structural layer that keeps the death benefit out of the taxable estate and directs how proceeds are used.

Responsibilities the family takes on

An ILIT is a long-term commitment. Families should expect to:

• Work with an estate planning attorney to draft and update the trust
• Choose a trustee carefully, often an independent third party
• Send and document Crummey notices each year
• Maintain a separate trust bank account
• Review the policy and trust regularly as laws, family, and finances evolve

Common mistakes to avoid

A few patterns we see come up repeatedly in conversations about ILITs:

• Treating the trust as an afterthought instead of a core legal structure
• Choosing a family member trustee who does not have time to administer it properly
• Letting policy reviews lapse for many years
• Failing to coordinate the ILIT with the broader estate plan

A practical next step

If you already own permanent life insurance personally and your estate is large enough that estate tax exposure is realistic, it is worth asking whether an ILIT belongs in your plan. We are happy to help you think through the question and coordinate with your attorney and accountant.

This article is educational and is not legal, tax, or investment advice. Trust planning should always be done with qualified counsel.