231 / How does an irrevocable life insurance trust work?

The irrevocable life insurance trust is created during the grantor’s life. The trustee purchases a policy on the life of the grantor. The trust should be the owner and premium payor of the policy and the grantor/ insured should have no ownership interests in the life insurance policy. The beneficiaries of the trust are often family members of the grantor—a spouse, children, grandchildren, and spouses of children and grandchildren.

Because the trust is funded with a life insurance policy on the grantor’s life, funding may be accomplished using an existing policy that the grantor gifts to the trust. Unless the insurance policy is paid up, the trustee will have to pay the annual premiums. The grantor usually makes annual transfers of cash to the trust so that the trustee can pay the premiums.¹ These annual transfers are gifts, meaning that the gift tax annual exclusion may be available to shelter the annual cash transfers from the federal gift tax up to the annual exclusion amount ($19,000 for 2025).²

1. IRC § 677.