How an Irrevocable Life Insurance Trust (ILIT) Works

An ILIT is a trust that is funded by a life insurance policy or life insurance proceeds. If properly structured, an ILIT can help minimize gift and estate taxes.

During life

Donor (Insured)
  • Creates irrevocable trust
  • Includes Crummey withdrawal provision (allows beneficiaries to withdraw payments made to the trust)
  • Names independent trustee
  • Makes gifts for premium payments
  • Files GSTT and/or gift tax returns, if necessary
  • Reports trust income on personal annual income tax return
Trust
  • Trust or trustee buys and owns policy on life of insured
  • Serves proper Crummey notice to the beneficiaries
  • Pays premiums on policy
Beneficiaries
  • Do not actually exercise their Crummey withdrawal rights



At death

Decedent's (Insured's) Taxable Estate
(does not include proceeds of insurance policies owned by the ILIT)

Executor:

  • Settles estate
  • Pays estate taxes
  • Distributes remaining assets to beneficiaries

Trust
  • Receives proceeds of policy
  • Distributes proceeds according to terms of trust

Taxes paid
Beneficiaries
  • Receive distributions from ILIT free of estate taxes
  • Receive remaining assets from decedent's taxable estate net of estate taxes