Irrevocable Life Insurance Trust (ILIT)
An ILIT is an irrevocable trust that owns life insurance policies, removing death benefit proceeds from the insured's taxable estate while providing liquidity for estate taxes.
Exam Tip
ILIT removes life insurance from estate. Three-year rule for transfers (buy NEW in trust). Crummey powers for annual exclusion. Grantor cannot be trustee.
What is an ILIT?
An Irrevocable Life Insurance Trust removes life insurance proceeds from your taxable estate. The ILIT owns the policy, pays premiums, and receives the death benefit.
ILIT Benefits
| Benefit | Details |
|---|---|
| Estate Tax Exclusion | Death benefit not in estate |
| No Income Tax | Proceeds income-tax-free |
| Liquidity | Cash for estate taxes |
| Creditor Protection | Protected from beneficiaries' creditors |
Three-Year Rule
If existing policy transferred, included in estate if death within 3 years. Solution: Buy NEW policy in ILIT's name.
Crummey Powers
To use annual exclusion ($19,000/beneficiary 2025), beneficiaries must have withdrawal rights (30-45 days).
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Related Terms
Irrevocable Trust
An irrevocable trust is a legal arrangement where the grantor permanently transfers assets out of their estate into a trust that generally cannot be modified, amended, or terminated, providing potential estate tax benefits and asset protection.
Crummey Power
A Crummey power gives trust beneficiaries a temporary right to withdraw contributions made to the trust, converting gifts to the trust into present interests that qualify for the annual gift tax exclusion.
Unified Credit (Estate Tax Exemption)
The unified credit is a federal tax credit that exempts a specified amount of assets from estate and gift taxes during a person's lifetime and at death, set at $13.99 million for 2025 and $15 million for 2026 per individual.