How To Reduce Estate Tax Using Irrevocable Life Insurance Trust

What is irrevocable life insurance trust (ILIT)? ILIT is a tool in estate planning that protects your life insurance benefits from being subject to estate tax. Usually, the life proceeds of your life insurance policy are included as part of your gross estate.

But with an ILIT that is adequately drafted, these proceeds can be removed from your estate. This is how life insurance works:

If you die and leave behind an estate that exceeds a certain amount, usually called the lifetime exemption amount, any amount in excess becomes subject to estate tax. As such, any move you make to reduce the size of your taxable estate while you are alive will also reduce the estate tax burden on your property.

How The Irrevocable Life Insurance Trust Works

The life exemption amount is currently $11.7 million per person, but this amount keeps changing with time. However, experts project that the amount will reduce by at least half in the next few years.

This means that if you have a substantial life insurance policy, the size of your estate could increase and, with it, the likelihood that you will be due on estate tax. This is why you need an ILIT to ensure your proceeds do not become part of your estate.

And since the ILIT is irrevocable, the life insurance policy will be removed from your estate. However, you have to put the policy in a trust, which means you cannot control the policy or claim it.

Typically, the “trust” acts as the middle man between the people that will benefit from the life insurance (beneficiaries) and the policy. Once the grantor dies – the person who pays for the life insurance – the insurance benefit is paid to the trust, the named beneficiary, and owner of the policy.

After this, the trustee manages the funds on behalf of the primary beneficiaries and for their benefit.

  • Please note: you should avoid any indications of ownership in the policy so that only the trust appears to be the undisputed policy owner. This means that the trust should pay the policy premiums through their bank account. Never use your bank account to pay for the premiums. This is the only way to ensure the policy remains irrevocable. Nonetheless, you can include instructions on how the funds should be distributed or invested among your beneficiaries in the trust document.


An ILIT is an excellent choice if you have a significant estate and a substantial life insurance policy that will provide massive benefits. After all, the trustee, as they control the policy benefits, will protect your beneficiaries. And in using an ILIT, you will keep your policy away from your gross estate, which, in turn, will reduce your estate tax. But keep in mind that by irrevocable, it means you cannot change or cancel the trust. Our law office will answer any and all estate questions you may have. Get in touch now so you can take advantage of the tax-saving incentives available to you and the estate.

Recent Posts