ILIT
An ILIT is an irrevocable trust that owns a life insurance policy on the grantor's life. The grantor pays premiums into the trust (gifts to the trust); the trust pays the policy carrier. At the grantor's death, the death benefit pays into the trust rather than to the grantor's estate. Trustees distribute proceeds to beneficiaries according to trust terms — keeping the entire death benefit outside the federal estate-tax base.
Life insurance proceeds are normally included in the insured's estate under §2042 if the insured had any 'incidents of ownership' — including the right to change beneficiaries, borrow against cash value, or surrender the policy. The ILIT solves the inclusion problem by having a separate legal entity (the trust) own the policy from inception. The grantor gives up all incidents of ownership; the trust acts as policyowner; the trustees decide how to use the eventual death benefit.
The Crummey withdrawal power is the standard mechanism for funding ongoing premium payments. The grantor gifts premium-equivalent cash to the ILIT each year. Beneficiaries receive notice (the 'Crummey letter') of a temporary right to withdraw the gift — typically 30 days. The withdrawal right qualifies the gift for the annual gift-tax exclusion ($19,000 per donor per recipient for 2026). Beneficiaries are expected to NOT exercise the withdrawal (it would defund the policy), but the legal right is what triggers the exclusion.
The 3-year lookback under §2035 is the major risk to existing-policy contributions. If the grantor transfers an existing policy to an ILIT and dies within 3 years, §2035 pulls the death benefit back into the estate as if the transfer hadn't occurred. This is why most ILITs are funded with a brand-new policy purchased BY THE TRUST — the policy is owned by the trust from issue, and the §2035 lookback never triggers. Existing-policy transfers are sometimes unavoidable (when the insured can't get new coverage due to age or health) but are the high-risk path.
Irrevocability is real. Once funded, the ILIT cannot be amended by the grantor. Beneficiary changes, trustee changes, and distribution-rule changes require either a trust-protector amendment (if the trust document includes one), state-law decanting (moving assets to a new trust with different terms), or a court-supervised modification. Most ILITs include trust-protector provisions specifically because life-insurance-funded irrevocable trusts often outlive their original family-circumstances design.
- Year 0ILIT formation + new policy purchaseTrust acquires policy from inception. Grantor has no incidents of ownership.
- Years 1–NAnnual Crummey fundingGrantor gifts premium-equivalent cash. Beneficiaries receive Crummey letters; withdrawal rights expire unused; trust pays premium.
- Year ~5–80Trust holds policy until grantor's deathCash-value policies accumulate; term policies remain in force.
- DeathDeath benefit pays to trustProceeds distribute to beneficiaries per trust terms — entirely outside the grantor's federal estate.
Synthetic UHNW households should include ILITs at realistic frequency — roughly 30–40% of households with $10M+ estates use them. The trust should track: policy face value, current cash value, annual premium, beneficiary tree, last Crummey-letter date, post-§2035 vs new-policy origin. Test scenarios should include the 3-year lookback risk on transferred policies.
Common pitfalls
- Transferring an existing policy and dying within 3 years — §2035 pulls the death benefit back into the estate.
- Failing to send Crummey letters annually — without the documented withdrawal right, premium gifts don't qualify for the annual exclusion.
- Letting the grantor pay premiums directly to the carrier instead of through the trust — re-establishes incidents of ownership and breaks the §2042 exclusion.
- Ignoring trust-protector provisions on long-running ILITs — the absence of an amendment mechanism makes outdated trusts difficult to fix.
Examples
Grantor with 3 children sets up ILIT with $5M term-life policy, $25,000/year premium. Each year, grantor gifts $25,000 to ILIT. Trustees send Crummey letters to all 3 children; each has a temporary withdrawal right of $8,333 (one-third). All 3 gifts are below the annual exclusion ($19,000 per donor per recipient for 2026). Children do not exercise (defunding would terminate their eventual share); after 30 days, the trust uses the funds to pay the carrier. No gift-tax cost; no exemption used.