Irrevocable Life Insurance Trust Attorney

An Irrevocable Life Insurance Trust (ILIT) is an advanced Estate Planning tool designed to remove your life insurance proceeds from your taxable estate while still ensuring that those proceeds are available to your beneficiaries. When properly structured, an ILIT can significantly reduce your estate tax exposure while providing liquidity to address estate settlement costs, debts, and your long-term family needs.

Without an ILIT, your life insurance proceeds are often included in your taxable estate, potentially increasing estate tax liability and reducing the amount ultimately passed to your heirs. An ILIT addresses this issue by transferring ownership of your life insurance policy to an irrevocable trust, placing the proceeds outside your taxable estate.

Irrevocable Life Insurance Trusts are commonly used to:

Reduce or eliminate estate taxes on your life insurance proceeds
Provide liquidity to pay estate taxes, debts, or administrative costs
Preserve your family wealth for future generations
Protect your insurance proceeds from creditors or mismanagement
Control how and when your beneficiaries receive funds

An ILIT can be funded with new or existing life insurance policies and typically includes provisions that govern premium payments, beneficiary distributions, and trustee responsibilities. Because the trust is irrevocable, careful planning is required to ensure that the structure aligns with your long-term goals and anticipated needs.

ILITs are often integrated into broader Estate Plans that include trusts, business succession planning, and charitable strategies. When coordinated correctly, they help ensure that your valuable assets — such as family businesses or real estate — do not need to be sold to cover estate expenses.

Due to their complexity and long-term implications, your ILIT must be drafted and administered with precision. Ongoing compliance, trustee oversight, and periodic review are essential to maintaining your intended tax and asset protection benefits.

How is an ILIT funded?

Once established, the trust can be funded in two ways:

The grantor transfers ownership of an existing life insurance policy to the ILIT. A downside of transferring an existing life insurance policy into the ILIT is that if the grantor dies less than three years after the transfer, the life insurance proceeds will be included in the calculation of the grantor’s estate tax. In other words, the grantor must live for a three-year period after transferring the policy to the ILIT for the proceeds to be excluded from the grantor’s gross estate.
The grantor transfers money to the ILIT which is then used to pay the first premium on a new life insurance policy owned initially by the ILIT. This avoids the 3-year holding requirement that is imposed by the IRS when an existing policy is transferred to the ILIT.

With either funding method, the ILIT becomes the policy’s owner and beneficiary, and upon the grantor’s passing, the trust distributes the insurance proceeds to the beneficiaries of the ILIT, or continues to hold the proceeds for the beneficiaries, all pursuant to the terms of the trust agreement. The irrevocable life insurance trust is especially attractive because it does not require giving away your assets, other than what may be necessary to arrange for payment of annual premiums.

Crummey Provisions / Beneficiary Withdrawal Rights

When an ILIT policy isn’t paid up, premium contributions must qualify as present interest gifts to avoid gift tax issues. This is done using Crummey provisions, which give beneficiaries a short-term (usually 30–60 days) right to withdraw contributions. That temporary, enforceable right allows the grantor to use the annual gift tax exclusion, even though gifts to trusts are normally considered future interests.

If beneficiaries don’t withdraw the funds, the right lapses and the money remains in the trust to pay insurance premiums. Beneficiaries rarely withdraw funds, but they must be properly notified for the strategy to work.

Because tax compliance is strict and laws change, Crummey provisions must be carefully drafted and managed with the help of an experienced estate planning attorney.

Mitigation of Estate Taxes

One of the primary advantages of an ILIT is its ability to reduce the taxable estate of the grantor. Life insurance policies held in the grantor’s name are subject to estate taxes upon their passing. However, by transferring ownership of the policy to an ILIT, the policy’s value is excluded from the grantor’s estate. Consequently, this can significantly reduce the potential estate tax burden, ensuring that a more substantial portion of the estate passes to the intended beneficiaries.

Liquidity to Pay Estate Taxes

Another big advantage of an ILIT is its ability to provide liquidity to pay estate taxes, given that estate taxes, when due, are owed to the IRS 9 months after death, and many estate assets are not easily made liquid and therefore can’t be used to pay the estate taxes when due.

Protection of Life Insurance Proceeds

In some cases, life insurance proceeds may be vulnerable to creditors’ claims if left directly to the beneficiaries. By using an ILIT, the proceeds are shielded from the beneficiaries’ creditors since the trust owns and controls the policy. Additionally, the ILIT can be structured to provide asset protection for the beneficiaries, safeguarding their inheritance from potential financial difficulties or lawsuits.

Control and Flexibility

Although an ILIT is irrevocable, it still offers a degree of control and flexibility to the grantor. During the trust’s establishment, the grantor can outline specific guidelines for the distribution of the insurance proceeds to the beneficiaries. The trust can be structured to distribute funds incrementally over time, ensuring that beneficiaries receive financial support throughout their lifetimes. Moreover, the grantor can designate a trustee who acts in accordance with the grantor’s wishes, managing the trust and adhering to the stipulated distribution plan. The grantor can even serve as trustee of the ILIT if desired.

Privacy and Confidentiality

Unlike a will, which becomes a public document after probate, an ILIT provides a level of privacy and confidentiality for the grantor and beneficiaries. Since the trust operates independently of the probate process, details regarding the life insurance proceeds and the beneficiaries remain confidential. This confidentiality protects the family’s financial affairs from public scrutiny and potential disputes.

Smooth Wealth Transfer

The establishment of an ILIT allows for a seamless transfer of wealth to beneficiaries. Upon the grantor’s passing, the trust assets, including the life insurance proceeds, can be distributed directly to the beneficiaries without the delays and expenses associated with probate. This enables beneficiaries to access their inheritance promptly, ensuring financial stability during a challenging time.

Why Choose Farr Law Firm

Farr Law Firm brings strategic insight and disciplined execution to Irrevocable Life Insurance Trust planning.

Advanced Trust and Estate Planning Experience: The firm regularly designs and implements ILITs as part of sophisticated estate plans.
Tax-Aware Structuring: Careful attention is given to estate, gift, and generation-skipping tax considerations.
Integrated Planning Approach: ILITs are coordinated with trusts, business interests, and long-term wealth strategies.
Precision and Compliance Focus: Emphasis on proper drafting, funding, and administration.
Clear, Professional Guidance: Clients receive practical explanations of complex trust structures and long-term implications.

Use Life Insurance Strategically to Protect Your Legacy

An Irrevocable Life Insurance Trust can be a powerful tool to preserve wealth and reduce estate tax exposure. Farr Law Firm provides experienced guidance to help ensure this strategy aligns with your long-term goals. Contact us to discuss whether an ILIT is right for your estate plan.