9126 / What is an irrevocable life insurance trust (ILIT) and how can an ILIT be useful in a blended family’s estate plan?

An irrevocable life insurance trust (ILIT) is a trust funded by life insurance that cannot be modified, amended or revoked without the permission of the beneficiary. It is mechanism used in estate planning in which a grantor effectively removes all of his or her rights of ownership to the assets that have been transferred to the trust. The primary purpose of an ILIT is to reduce a decedent’s estate tax liability (while simultaneously providing for heirs) by removing a life insurance policy from the decedent’s gross estate.

An ILIT can be a valuable tool both for providing for children from a first marriage or a surviving spouse, and for reducing a decedent’s taxable estate. Prenuptial agreements ( Q 9092 to Q 9093) can be helpful in providing that a surviving spouse’s inheritance will be limited to proceeds from the life insurance policy held by the ILIT. A prenuptial agreement can also provide that if the couple divorces, the beneficiary-spouse must forfeit all rights to the trust assets (which would presumably then pass to the insured’s children or other heirs).

An ILIT allows a decedent to control who receives the proceeds of the life insurance policy because the proceeds are actually paid to the trust, and the governing trust documents then provide specific details as to who should receive the proceeds and under what circumstances. This strategy can also allow a decedent to protect an inheritance from the beneficiary’s creditors.

For individuals who wish to benefit a generation of beneficiaries that is more than one removed (so that the generation skipping transfer (GST) tax would apply), a portion of the GST exemption amount ($13.99 million per individual in 2025; $13.61 million in 2024, $12.92 million in 2023; $12.06 million in 2022; $11.7 in 2021)¹ can be applied to the transfers to the trust (thereby sheltering the entire amount of the proceeds from the GST tax). It should be noted that this can provide a valuable strategy for wealthy individuals who anticipate transferring wealth in excess of the exemption amount, as only the cash actually transferred to the trust to fund the life insurance policy premiums must be exempted. By allocating the GST tax exemption to those cash transfers, the larger value of the life insurance proceeds can be paid out entirely GST tax-free, while leaving a greater proportion of the exemption for allocation to other assets.

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1.  Rev. Proc. 2020-45, Rev. Proc. 2021-45, Rev. Proc. 2022-38, Rev. Proc. 2023-34.