A closer look

Have You Considered an Irrevocable Life Insurance Trust?

People signing documents
In brief
  • With the federal lifetime gift and estate tax exemption currently scheduled to decline in 2026, now may be a good time to consider an irrevocable life insurance trust (ILIT) as a reliable and tax-efficient means of transferring wealth.
  • Because the death benefit of a policy held in an ILIT does not count as part of the insured’s estate, a sizable death benefit may be distributed to heirs without triggering state or federal estate taxes.
  • ILITs can also help meet a variety of other goals, such as protecting assets from creditors, providing liquidity to help cover estate taxes, or leaving money to grandchildren and subsequent generations.

If you have life insurance or are contemplating the purchase of life insurance, it makes sense to consider the addition of an irrevocable life insurance trust, or ILIT. Put simply, if life insurance policies protect families — for example, by providing income and creditor protections and a death benefit — ILITs protect life insurance policies.

Particularly for families seeking to transfer wealth as tax-efficiently as possible, ILITs have long been a favored means for meeting a variety of estate planning goals. When a life insurance policy is held in an ILIT, ownership of the policy transfers from the insured individual to the trust. This feature enables the death benefit to move out of the estate and, eventually, to beneficiaries, tax-free.

While ILITs have been a popular tool for many years, the scheduled reduction of the lifetime gift and estate tax lifetime exemption in 2026 creates a new window of opportunity. Without a policy change, the currently high exemption, $12.92 million for individuals or $25.84 million for couples in 2023, will revert to $6.4 million for individuals and $12.8 million for couples in 2026 (indexed annually for inflation). As a result, if you haven’t done so already, it could be worthwhile to consider — and sooner rather than later — whether an ILIT might be right for you.

ILITs for a Variety of Purposes

For many policyowners, a life insurance death benefit offers peace of mind that a surviving spouse will have money to live on in the event of the policyholder’s passing. While families of wealth may not need that assurance, a death benefit may help them meet objectives such as transferring wealth to children and subsequent generations, helping heirs pay an estate tax bill, protecting heirs from inheriting too much money before they’re ready, or protecting assets from threats such as divorce proceedings, creditors, and lawsuits.

Within the ILIT, assets can be administered with the oversight and guidance of a trustee, ensuring that the grantor’s wishes are met. One of the most attractive qualities of ILITs is their flexibility, enabling individuals to achieve a variety of objectives, including:

Wealth transfer. When a life insurance policy is owned by an ILIT rather than by the insured individual, the death benefit does not count as part of the individual’s estate. This feature enables an individual to potentially leave significant assets to heirs, without creating a tax event for the estate. Annual premiums, if paid by the individual, are considered taxable gifts, yet taxes will be small relative to taxes if the policy were left as part of the estate. And even these potential taxes may be mitigated by using one’s annual gift tax exclusion ($17,000 in 2023, indexed annually for inflation) or by using alternative means of funding the premiums (see “Setting Up an ILIT” below).

Case Study: Leaving the Full Benefit

A mother sets a personal goal of leaving $10 million in liquid assets to her grown children to help them raise and educate their families. She considers purchasing a whole life insurance policy with a $10 million death benefit. Yet she’s concerned that the size of her overall estate, and uncertainties over the estate tax exemption, could expose the benefit to 40% estate taxes, leaving just $6 million for her kids.

To fulfill that $10 million goal, she would have to purchase a policy with a taxable benefit of closer to $17 million. As an alternative, she creates an ILIT, naming her children as beneficiaries and a trusted friend as trustee. For the price of $15,000 in annual premiums (covered under her annual gift tax exclusion), plus modest setup and maintenance fees for the trust, she has gained the peace of mind in knowing her children will receive the full $10 million she envisioned.

Protecting wealth from threats. Outside of an ILIT, a death benefit may be subject to claims if a beneficiary is divorced, or from creditors or lawsuits if a beneficiary runs into financial or legal trouble. Or parents or grandparents may have concerns about whether younger family members are prepared to responsibly handle a large influx of wealth. As with other trusts, a key advantage of ILITs is the ability to protect the death benefit from those external threats. And an appointed trustee (see “Setting Up an ILIT”) will have some discretion on how and when to distribute the assets to family members.

Leaving more to grandchildren. If your grown children are financially secure and will likely pass down any inheritance to their own kids and grandkids, a death benefit passing through their hands could create estate tax issues for them. Instead, you might create a dynasty trust, applying the generation-skipping tax exemption, enabling the benefit to go directly to grandchildren or great-grandchildren at the appropriate time.

Money for estate taxes and other expenses. Because the policy is held outside of the estate, the death benefit may provide an important source of liquidity for the family as the estate is settled. For example, the death benefit could be used to cover an estate tax bill to prevent a forced sale of illiquid assets such as a business, real estate, or private equity holdings. Though an ILIT established for beneficiaries can’t directly pay an estate tax bill, the trust might, for example, purchase assets from the estate, giving the estate the liquidity it needs to pay the tax.

Preserving a Family Business

The owner of a business valued at $50 million hopes the company will survive across generations. Yet he’s concerned that heirs might have to sell the business just to pay the 40% ($20 million) estate tax. He averts that threat by creating an ILIT containing an insurance policy with a $20 million death benefit.

After his death, the ILIT uses the death benefit to purchase a $20 million share of the company from the estate. The estate now has the liquidity it needs to pay the tax. And the trustee of the ILIT can then hold company shares for the benefit of descendants according to the owner’s stated wishes.

Setting Up and Funding an ILIT

ILITs may be created with a new life insurance policy or by rolling an existing policy into the trust. A new policy enables you to customize the terms and death benefit to meet specific needs. In some cases, though, you may prefer to use an existing life insurance policy. For example, an existing policy may have advantageous rates or terms that you would have trouble replicating in a new policy, due to your current age, health, or other factors. But be aware of restrictions such as the “three-year rule,” stipulating that the policy must be owned by the ILIT for at least three years in order for the death benefit to be deemed part of the trust rather than the grantor’s estate.

Another important consideration involves naming a trustee. Because an ILIT involves giving up control, the grantor is typically not the trustee. Often, it’s a trusted family member or friend or, potentially, a corporate trustee. If you choose a friend or family member, someone younger than you may be more likely to be able to administer the trust later on.

Paying the premiums. Because the trust rather than the grantor owns the life insurance policy, the trustee must pay the premiums from trust assets. There are a variety of options for funding the ILIT.

Annual gifts. A straightforward approach is to make annual gifts sufficient to cover the premium payments. Ideally, those gifts can be counted against your annual gift tax exclusion. One condition for annual exclusion treatment is that the gift be a “present interest” and, therefore, be available to the beneficiaries. This is why trustees often send “Crummey letters” (named after a relevant court case) to notify beneficiaries of the gift.

Taxable gifts. If you plan to use the annual exclusion for other purposes, you could make a more sizable one-time gift to the trust. While that amount might be subject to gift taxes, the assets, once inside the ILIT, could generate investment returns that the trustees could use to pay the premiums moving forward.

Loans to the ILIT. As an alternative to gifts, a grantor may choose to lend money to an ILIT. The trustee uses the loan to pay the premiums on the insurance policy, and pays annual interest to the grantor, based on an applicable federal rate (AFR) determined by the IRS. Later, the trust uses part of the death benefit to repay the loan to the estate.

Split-dollar arrangements. Another approach, similar to a loan, is a split-dollar arrangement, so called because the grantor and the trust split the costs of the policy. The grantor provides funding for the premiums, with the trustee making annual payments to the grantor equal to the policy’s “economic benefit costs” based on IRS tables. In lieu of payments, the economic benefit costs may count as gifts from the grantor, for tax purposes. Either way, a potential benefit of the split-dollar approach is that the economic benefit costs may be lower than the AFR payments associated with a loan.

Considering the Tradeoffs

For all of their benefits, ILITs do come with the costs of establishing and maintaining the trust, and with restrictions. As with any irrevocable trust, ILITs can be difficult to change or amend once you’ve put them in place. And in transferring ownership of the life insurance policy, you give up “incidents of ownership,” including the ability to change death benefit beneficiaries or to cancel the policy or borrow against it. And unlike with traditional life insurance, you won’t be able to tap the accrued cash value during your lifetime. While your intentions may be to give as much as possible to your heirs, review the decision carefully to ensure that your generosity doesn’t conflict with your personal financial needs.

While life insurance is generally considered a lower-risk investment, changing economic conditions may affect a policy’s crediting rates, cash value, and market performance. It’s important to carefully consider the terms and monitor performance over the years. Another consideration: The unpredictability of the grantor’s lifespan creates return risk. Early on, the policy’s internal rate of return (IRR) — based on the amount paid in premiums versus the death benefit — is likely to far exceed the returns one might realize through market investments. Yet because the IRR declines with each year the policy is in place, the returns may ultimately be lower than desired if the grantor lives to an advanced age.

In addition to these concerns, care must be taken to follow trust rules in order to preserve the death benefit’s preferential tax treatment. For example, if you as grantor pay the amount of the annual insurance premiums into the trust, you are making a gift to the trust that must be treated as such, including the requirement to file annual gift tax returns.


Despite these considerations, ILITs offer an established solution for individuals looking for a tax-efficient means to transfer significant assets without incurring estate taxes, and for a variety of other beneficial purposes. And with the future of the gift and estate tax exemption in question, now may be a good time to review your estate plan and decide whether an ILIT can be a useful tool.

Your Bessemer Trust advisor can walk you through your options and help you decide whether an ILIT might be a good fit for your needs and your overall wealth goals, and can arrange for a conversation with one of our life insurance specialists.

This material is for your general information. It does not take into account the particular investment objectives, financial situation, or needs of individual clients. This material is based upon information obtained from various sources that Bessemer Trust believes to be reliable, but Bessemer makes no representation or warranty with respect to the accuracy or completeness of such information. The views expressed herein do not constitute legal or tax advice; are current only as of the date indicated; and are subject to change without notice. Forecasts may not be realized due to a variety of factors, including changes in economic growth, corporate profitability, geopolitical conditions, and inflation. Bessemer Trust or its clients may have investments in the securities discussed herein, and this material does not constitute an investment recommendation by Bessemer Trust or an offering of such securities, and our view of these holdings may change at any time based on stock price movements, new research conclusions, or changes in risk preference.

Trevor Hamilton

Trevor J. Hamilton

Director of Life Insurance Advisory

Trevor is responsible for leading the firm’s life insurance advisory practice, as well as the oversight of trust-owned policies.