The ILIT: The Estate Planning Tool That Keeps Life Insurance Out of the Taxable Estate
Without an ILIT, your life insurance death benefit is included in your taxable estate. For large estates, that means 40% estate tax. Here is how an ILIT eliminates that problem.
Life insurance is one of the most tax-efficient ways to transfer wealth — but only if it is structured correctly. Without an Irrevocable Life Insurance Trust (ILIT), the death benefit is included in your taxable estate and subject to the 40% federal estate tax. An ILIT fixes that problem.
How an ILIT Works
An ILIT is an irrevocable trust that owns your life insurance policy. Because the trust — not you — owns the policy, the death benefit is excluded from your taxable estate. The trust receives the death benefit and distributes it to your beneficiaries according to your instructions.
The Estate Tax Problem It Solves
The federal estate tax exemption is $13.61 million per person in 2024 (scheduled to be cut roughly in half in 2026 when the Tax Cuts and Jobs Act expires). Estates above the exemption pay 40% estate tax. A $5 million life insurance policy in your estate could cost your heirs $2 million in estate taxes.
The Crummey Notice Requirement
To fund the ILIT, you make annual gifts to the trust. To qualify for the annual gift tax exclusion ($18,000 per beneficiary in 2024), you must send Crummey notices to beneficiaries giving them the right to withdraw the gift for a limited period. This is a technical requirement that an estate planning attorney can handle.
When an ILIT Makes Sense
An ILIT makes sense if: your estate exceeds or is approaching the estate tax exemption, you want to provide liquidity to pay estate taxes, you want to control how the death benefit is distributed, or you want to protect the death benefit from beneficiaries' creditors.
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