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Irrevocable life insurance trust (ILIT)

Maintain estate assets with an ILIT

Some high net worth clients need liquidity outside of their estate, have estates valued high enough to be subject to estate taxes (federal and/or state), or wish to protect assets outside of their estate for creditor protection or legacy planning.

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What is an ILIT?

An irrevocable life insurance trust (ILIT) is an irrevocable trust funded with life insurance.

Benefits of an ILIT

If properly administered and drafted, an ILIT:

  • May reduce both federal and state estate taxes by taking death benefit proceeds out of the estate
  • Provides liquidity at death to pay estate taxes or increase the amount beneficiaries receive
  • Allows professional management of trust assets, if a corporate trustee is used
  • Protects the trust assets from beneficiaries’ creditors
  • Allows an independent trustee (such as a corporate trustee) absolute discretion to make distributions to the beneficiaries

Considerations of an ILIT

  • Desired annual life insurance premium may be higher than annual exclusion gifts
  • The grantor cannot terminate the ILIT once it is established
  • If circumstances change, the grantor is not able to change the terms of the trust after it is established
  • Assets in an ILIT are not available for the grantor’s access or use
  • Assets transferred into the ILIT may only be used for the benefit of trust beneficiaries — the grantor should not and cannot have access to them

Target client

A business owner looking for life insurance to be owned within an irrevocable trust for estate tax or asset protection reasons, but does not need access to the policy. They may:

  • Have or will have a federal or state estate tax liability
  • Wish to protect and grow assets outside of their estate
  • Want to protect the management of assets and ensure responsible behavior of minor beneficiaries, those receiving government aid, or someone who demonstrates less responsible behaviors
  • Want to protect assets from creditors
  • Want to control the distribution of assets to the beneficiaries


Additional estate planning strategies

BOLD highlights several different estate planning strategies to fit your clients needs.

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How an ILIT works

An ILIT is a trust created to own life insurance outside your client’s estate. If it’s drafted and administered properly, the death benefit from the policy is not subject to income or estate taxes upon your client’s death.* This is how one works:

  • Client(s) hire an attorney to draft the trust document.
  • They name an independent trustee to administer the trust.
  • The trustee applies for life insurance on the life (lives) of the client setting up the trust (the “grantor”).
  • Client makes annual, or a lump sum, gift(s) to the trustee to pay life insurance premiums.
  • At the grantor’s death, the life insurance benefit is paid to his/her heirs.

*If owner/insured are different, the death benefit will be paid upon death of the insured.

Irrevocable life insurance trust

Estate and income tax-free death benefit paid to children

G r a n t o r Child 1 Child 2 Child 3 ILIT At death of insured(s) G r a n t o r Child 1 Child 2 Child 3 ILIT At death of insured(s)

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Life insurance products contain fees, such as mortality and expense charges, (which may increase over time) and may contain restrictions, such as surrender periods.

Please keep in mind that the primary reason for purchasing life insurance is the death benefit.

Additional agreements may be available. Agreements may be subject to additional costs and restrictions. Agreements may not be available in all states or may exist under a different name in various states and may not be available in combination with other agreements.

Policy loans and withdrawals may create an adverse tax result in the event of lapse or policy surrender and will reduce both the surrender value and death benefit. Withdrawals may be subject to taxation within the first fifteen years of the contract. Clients should consult their tax advisor when considering taking a policy loan or withdrawal.

The Policy Design chosen may impact the tax status of the policy. If too much premium is paid, the policy could become a modified endowment contract (MEC). Distributions from a MEC may be taxable and if the taxpayer is under the age of 59 ½ may also be subject to an additional 10% penalty tax.    

An annuity is intended to be a long-term, tax-deferred retirement vehicle. Earnings are taxable as ordinary income when distributed, and if withdrawn before age 59½, may be subject to a 10% federal tax penalty. If the annuity will fund an IRA or other tax qualified plan, the tax deferral feature offers no additional value. Qualified distributions from a Roth IRA are generally excluded from gross income, but taxes and penalties may apply to non-qualified distributions. Please consult a tax advisor for specific information. There are charges and expenses associated with annuities, such as surrender charges (deferred sales charges) for early withdrawals.

This information may contain a general discussion of the relevant federal tax laws. It is not intended for, nor can it be used by any taxpayer for the purpose of avoiding federal tax penalties. This information is provided to support the promotion or marketing of ideas that may benefit a taxpayer. Taxpayers should seek the advice of their own tax and legal advisors regarding any tax and legal issues applicable to their specific circumstances.

For financial professional use only. Not for use with the public. This material may not be reproduced in any form where it is accessible to the general public.

DOFU 10-2022