Meet the ILIT: A Powerful Wealth Tool
Meet the ILIT: A Powerful Wealth Tool
ILIT stands for Irrevocable Life Insurance Trust. A bit of a mouthful, but really this boils down to two different financial products:
An Irrevocable Trust
A Life Insurance Policy
In this case, the life insurance is actually held inside the Irrevocable Trust, where the Trust is both the owner and beneficiary.
So why would someone want this, and who does it benefit?
First off, an ILIT is not needed in most financial plans. This is because it’s primary use is to reduce or eliminate estate tax. As of 2025, the estate tax exemption is $13.99 million. If your estate isn’t worth more than that, than the ILIT’s primary purpose becomes moot.
But for those estates’ worth more than that, or when there is an expectation that an estate will be worth more than that, or there is an expectation the estate tax exemption will be lowered by a future congress, then an ILIT can be worth considering.
Here are the main benefits of an ILIT:
Estate Tax Protection
Because the Trust owns the life insurance, it is not considered part of your estate. This is because, and only because, it is in an irrevocable Trust. It’s the irrevocable part that makes this work. Once any money goes into an irrevocable trust, it is essentially irreversible, as the name implies. This is why it can be considered not a part of your estate, because you have permanently transferred ownership from yourself to the Trust.
Liquidity at the Right Time
Wealth often comes in the form of real estate, businesses, or illiquid investments. When estate taxes come due, heirs may be forced to sell valuable assets at the wrong time.
An ILIT provides liquidity through the death benefit, giving your heirs cash to pay estate taxes or settle debts without liquidating legacy assets.
Wealth Transfer Control
Although technically the Trust is the beneficiary of an ILIT, the true beneficiaries are those who are in the Trust document itself. And because it is a Trust, you can set up the payouts in pretty much any manner you choose. For example, you can stagger distributions over time, protect assets from creditors, or set conditions (such as reaching a certain age or milestone).
Creditor and Lawsuit Protection
Since the trust owns the policy, assets inside an ILIT are generally protected from lawsuits or creditors, offering an additional shield around family wealth.
Are there any downsides to an ILIT? Indeed there are.
Irrevocability: As I mentioned above, the term irrevocable is not just for show. You have to mean it. Once established, you generally can’t change it. If tax laws change or family dynamics shift, the ILIT may not be as flexible as other tools.
Gift Taxes: Premium payments are considered gifts to the trust. Proper use of the annual exclusion and Crummey notices are essential.
Three-Year Rule: For someone nearing the end of their road who all of a sudden realizes their estate is going to owe millions in taxes, it may be too late. If you transfer an existing policy into the ILIT and pass away within three years, the proceeds may still be included in your estate.
Administrative Burden: Trustees must handle notices, premium payments, and compliance carefully. Professional trustees are often recommended.
Cost: Legal setup, trustee fees, and insurance premiums can add up. However, for families with multimillion-dollar estates, the savings in taxes and asset preservation often far outweigh the costs.
An Example of an ILIT saving millions in taxes:
Imagine someone with a $30 million estate. This means roughly $16 million of their estate will be subject to estate taxes, and the vast majority would be taxed at 40%. That’s roughly $6.4 million the estate will pay in taxes. Read that again.
I think most would agree that they don’t want over $6 million going to the IRS when it could have benefited their loved ones and their legacy.
So, if this person establishes an ILIT that owns a $10 million life insurance policy, that reduces their taxable estate from $30 million to $20 million, bringing their tax bill from $6.4 million to about $2.4 million. Who doesn’t want to save $4 million in taxes?? Let’s hope no one. There are more ways to reduce that number even further, but this quick example shows the immense power an ILIT can have on a person's estate.
When to Consider an ILIT:
Your estate is likely to exceed the federal estate tax exemption.
You own large illiquid assets such as businesses, farms, or real estate.
You want to provide liquidity for estate taxes without burdening heirs.
You value control and asset protection for your beneficiaries.
Main Takeaway:
An ILIT is one of the most effective ways for high-net-worth families to reduce estate taxes, provide liquidity, and preserving assets for generations. While irrevocability may feel restrictive, the benefits usually far outweigh the loss of flexibility.
For families facing multimillion-dollar estates, an ILIT is not just an insurance vehicle—it’s a wealth preservation strategy.
If you think you may be in need of an ILIT, feel free to reach out to our team to discuss further.
Ryan Page, CFP®, MBA®
Office & Text:720-826-1092
This information is not intended to be a substitute for specific individualized tax or legal advice. We suggest that you discuss your specific situation with a qualified tax or legal advisor.
This is a hypothetical example and is not representative of any specific situation. Your results will vary.
This material contains only general descriptions and is not a solicitation to sell any insurance product or security, nor is it intended as any financial or tax advice. Guarantees are based on the claims paying ability of the issuing company. If you need more information or would like personal advice you should consult an insurance professional. You may also visit your state’s insurance department for more information.
