An Irrevocable Life Insurance Trust Can Help Avoid Estate Taxes

Now is the time to think about steps you can take to keep your estate from being taxed with an irrevocable life insurance trust that allows you to pass money on to your heirs and avoid state and federal estate taxes.

Senate Democrats have proposed lowering the current estate tax exemption from $11.7 million to $3.5 million for individuals, and from $23.4 million to $3.5 million for couples. While it is unclear if this proposed estate tax legislation will pass, it is likely that changes to the estate tax are coming. Even if Congress takes no action, the current tax rate will sunset in 2026 and essentially be cut in half, to about $6 million per individual. 

One way to make up for any estate tax your estate may have to pay is to set up an irrevocable life insurance trust (ILIT) and funding it with an insurance policy that includes a death benefit that will pay your heirs some or all of the amount your estate will be taxed. If you purchase such a life insurance policy directly, it may be taxed as part of your estate. But if an ILIT owns the policy, it may pass outside your estate.

Irrevocable Life Insurance Trust Requirements

While an ILIT can be highly beneficial, it is also complicated to set up and maintain properly. The following are some of the requirements: 

  1. Trustee. If you are setting up the ILIT you cannot also serve as a trustee. If you are the trustee, you have control of the trust, which could lead to the trust being included in your estate. You will need to name another trusted person or financial institution to act as trustee. 
  2. Policy ownership. The irrevocable life insurance trust must own the life insurance policy. If you transfer an existing policy to the trust and die within three years, the policy will still be considered a part of your estate. To avoid this risk, the trust can purchase a policy directly rather than receive an existing policy. 
  3. Premiums. You need to transfer funds to the irrevocable life insurance trust to pay the policy premiums, which creates an issue with gift taxes. A transfer to a trust is usually not subject to the $15,000 yearly gift tax exclusion. In order for a gift to qualify for the exclusion, the recipient must have a “present interest” in the money. Because a promise to give someone money later does not count as a present interest, most gifts to irrevocable life insurance trusts aren’t excluded from the gift tax. To avoid this, you can use something called a “Crummey” power which gives beneficiaries the right to withdraw the funds transferred to the trust for up to 30 days. As part of the process, the trustee needs to send them a letter, known as a Crummey letter, letting them know about the trust funding and their right to withdraw the funds. After the 30 days have passed, the trustee can use the funds to pay the annual insurance premium. You run the risk of the beneficiaries withdrawing the funds, but if they know that by allowing the money to stay in the irrevocable life insurance trust they will receive more money later, it shouldn’t be a problem. 
  4. Beneficiaries. The beneficiary of the life insurance policy is usually the irrevocable life insurance trust. Once the funds are deposited in the trust, the trustee can distribute the assets to the beneficiaries in the way specified by the trust. For example, if your beneficiaries are minors, you can wait to have the trustee distribute the assets. Keeping the assets in the irrevocable life insurance trust will also protect them from your beneficiaries’ creditors.   

Downside of Irrevocable Life Insurance Trust

The downside of an irrevocable life insurance trust is that you do not have the ability to change it once it is set up — although the policy would effectively be canceled if you stopped paying the premiums.

If you are considering this type of trust, discuss it with your attorney. 

It is extremely important to talk with your attorney before creating any estate planning documents, especially such a tool as an irrevocable life insurance trust.  Consult with the estate planning attorneys at Elville and Associates to make sure you have all the estate planning documents you need.  The firm offers free consultations for estate planning clients to understand your situation and goals and create a path forward for your family and you, offering peace of mind along the way.  To set your initial consultation, contact Legal Administrator Mary Guay Kramer at, or by phone at 443-741-3635.


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