Why would life insurance be subject to estate tax?

If you own a life insurance policy (or have "incidents of ownership"), the full death benefit is included in your taxable estate. A $5M policy owned by someone with a $12M estate could push the total above the $15M exemption, triggering 40% estate tax on the excess.

How does an ILIT solve this?

The ILIT owns the policy instead of you. Since you don't own it, the death benefit passes to your beneficiaries completely outside your taxable estate. The proceeds are income-tax-free and estate-tax-free.

Can I transfer an existing policy to an ILIT?

Yes, but there's a 3-year "lookback" rule. If you die within 3 years of transferring the policy, it's pulled back into your estate. Buying a new policy directly inside the ILIT avoids this issue entirely.

How do I pay the premiums?

You make annual gifts to the ILIT (using your $19,000 annual exclusion per beneficiary), and the trustee pays the premiums. The trustee must send "Crummey letters" giving beneficiaries a temporary withdrawal right to keep the gifts as annual exclusions.

Who should be the trustee?

Not you - that could give you incidents of ownership. A trusted family member, friend, or professional trustee (like a bank or trust company) should serve as trustee. Your spouse can be trustee if carefully structured.

Estate Planning

Irrevocable Life Insurance Trust (ILIT)

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advanced · $500K+

Life insurance you own is included in your taxable estate.

An ILIT owns the policy instead, keeping proceeds out of your estate.

With the $15M estate exemption (2026, made permanent by the OBBBA), this becomes critical.

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Key takeaways

Life insurance you own is counted in your taxable estate; an ILIT owns the policy instead so the proceeds stay outside it.
Proceeds then pass to heirs both income-tax-free and estate-tax-free.
Transferring an existing policy has a 3-year lookback; buying a new policy inside the ILIT avoids it.
You fund premiums with annual gifts to the trust, and the trustee (not you) manages the policy.

Requirements

Life insurance policy
Estate approaching exemption limits
Trust must be irrevocable

How to Implement

1Consult estate planning attorney
2Create ILIT before purchasing policy (or transfer existing)
3Gift premium payments to trust annually
4Trust owns and is beneficiary of policy
5Heirs receive proceeds outside your estate

The bottom line
An ILIT keeps life insurance proceeds out of a taxable estate, which matters most for estates near the exemption. The trust must own the policy, and you cannot serve as your own trustee.

Frequently Asked Questions

Educational Only: This information is for educational purposes. Consult a qualified financial advisor or tax professional before implementing.

Last reviewed: April 2026

Related estate planning strategies

Dynasty TrustTransfer wealth across multiple generations while avoiding estate taxes at each generation.Annual Gift Tax ExclusionGive $19,000/person/year tax-free - remove assets from estate without using exemption.Grantor Retained Annuity Trust (GRAT)Transfer appreciating assets to heirs with minimal gift tax - "estate freeze" strategy.

Sources

Internal Revenue Service, Rev. Proc. 2025-32
2026 inflation-adjusted amounts (tax brackets, standard deduction, estate & gift, FSA, credits)
Internal Revenue Service, Notice 2025-67
2026 retirement plan limits (401(k), IRA, SIMPLE, catch-up)
Internal Revenue Service, Rev. Proc. 2025-19
2026 HSA and HDHP inflation-adjusted limits

Educational information only. Not financial, tax, or legal advice or a recommendation. Figures are drawn from the primary sources cited above; verify current amounts with the source before acting.