Irrevocable Life Insurance Trusts: What They Are and How They Work

Protecting and transferring wealth efficiently requires sophisticated estate planning strategies. One powerful tool in wealth planning is the Irrevocable Life Insurance Trust (ILIT), which offers significant advantages for individuals seeking to minimize estate taxes and protect assets for future generations. 

As estate tax exemptions are scheduled to decrease significantly on January 1, 2026, many more families may need to consider incorporating ILITs into their financial planning. We recognize that life insurance estate planning can be complex, which is why we’re committed to helping you understand how these trusts work and their potential benefits for your legacy planning goals.

What Is an Irrevocable Life Insurance Trust (ILIT)?

An ILIT is a specialized trust designed specifically to own and manage life insurance policies. As an irrevocable trust, once established, it cannot be modified or revoked by the grantor. 

This permanent arrangement serves a crucial purpose: By removing the life insurance policy from your taxable estate, the death benefit proceeds can pass to your beneficiaries free from estate taxes. The trust becomes the owner and beneficiary of the life insurance policy, while you, as the grantor, relinquish all control over the policy and trust assets. 

This separation is essential for achieving the tax benefits and asset protection advantages that make ILITs valuable planning tools. When properly structured, an ILIT creates a clear legal distinction between the insurance policy and your estate, ensuring that the proceeds will not be subject to estate taxes upon your death.

How Do Irrevocable Life Insurance Trusts Work?

Establishing and operating an ILIT involves several key components and participants. 

First, you must create the trust and appoint a life insurance trustee who will manage the trust according to your wishes. This trustee must be someone other than yourself – typically a professional trustee or trusted advisor with experience in trust administration. The trustee's responsibilities include maintaining the policy, paying premiums, and eventually distributing the proceeds to your beneficiaries according to the trust's terms. 

When funding the trust, careful attention must be paid to gift tax implications. Premiums paid into the trust are typically structured as present interest gifts to qualify for the annual gift tax exclusion. A crucial timing consideration is the three-year lookback period; if an existing policy is transferred to an ILIT, you must survive for three years after the transfer for the policy to be excluded from your estate.

Common Uses of Irrevocable Life Insurance Trusts

ILITs serve multiple purposes in comprehensive estate planning strategies. Primarily, they provide a tax-efficient mechanism for transferring wealth to future generations. For estates likely to exceed federal or state estate tax exemption limits, an ILIT can prevent life insurance proceeds from pushing the estate over these thresholds. 

Beyond tax benefits, ILITs offer robust asset protection advantages. The trust structure shields the insurance proceeds from creditors and legal judgments, ensuring your beneficiaries receive their intended inheritance regardless of future circumstances. ILITs are particularly valuable for business owners and professionals in high-liability fields who want to protect assets for their heirs. 

Additionally, these trusts can provide liquidity for estate taxes without forcing the sale of other assets, such as family businesses or real estate holdings. They also offer flexibility in designing distribution schedules that align with your wishes for how and when beneficiaries receive funds.

Partner with Aegis Trust for Expert ILIT Management

The Aegis Trust team understands the complexities involved in establishing and managing Irrevocable Life Insurance Trusts. Our experienced team can provide comprehensive guidance throughout the process, from initial setup to ongoing administration. 

As your dedicated corporate trustee, we can ensure your ILIT operates efficiently and in compliance with all legal requirements. Contact us today to explore how an ILIT can enhance your estate planning strategy and help protect and preserve your legacy!