Irrevocable Life Insurance Trusts: The Fundamentals

October 28, 2010

Manhattan Life Insurance Company Building New York City 150x150 Irrevocable Life Insurance Trusts: The FundamentalsAs discussed in this post on common uses for trusts, an irrevocable trust is a separate entity you can create for many different purposes. The “Irrevocable Life Insurance Trust”, or ILIT, is one type of irrevocable trust that is set up to own life insurance on your life. With the ILIT, your family can ultimately experience great benefits, although at the price of complexity, as well as a loss of control of your life insurance.

Here are some highlights of the ILIT:

Life Insurance Kept Out of Your Estate

The ILIT is designed to take advantage of the fact that any life insurance on your life that you do not own yourself is not taxable in your estate. In fact, it is can also be set up to keep the insurance proceeds out of your partner’s and potentially even your descendants’ estates as well (more on this concept in a future post).

Payment of Your Estate Taxes

Here’s the idea. You buy a life insurance policy and transfer ownership to the ILIT. The ILIT is named the beneficiary of the policy. When you die, the proceeds go directly into the trust. Your ILIT can then exchange cash for your estate assets (such as real estate, your business, etc.) at fair market value. Your executor then uses that cash to pay the estate tax.

The effect is that not only is insurance not included as an asset in your estate, but it may also be used to help pay your estate taxes.

Incidents of Ownership

You cannot be trustee of your own ILIT. Otherwise, you will have “incidents of ownership” in your policy, meaning that you still have at least some powers or decision-making ability over it. If these are retained, the insurance proceeds will be included in your taxable estate.

Transfers Within 3 Years of Death

In general, if you transfer an existing insurance policy into the ILIT within 3 years of your death, the IRS will still consider the policy proceeds as a taxable asset that is included in your estate. This can potentially be avoided by the ILIT purchasing your policy at the outset or through a provision in the ILIT giving all assets directly to your spouse in case of premature death.

Payment of Insurance Premiums and Crummey Powers

To pay for the underlying insurance, you gift cash into the trust for it to pay the policy’s annual premiums. However, for a gift to avoid any incidents of ownership (as defined above) it must be a gift of a “present interest”. The IRS will view your direct check to the ILIT as a gift with a “future interest.” So now what?

A somewhat strange exception called a “Crummey Power” solves the problem.  When you write your check to the ILIT, the ultimate trust beneficiaries must be given the power to withdraw the amount of your check from the trust within at least 30 days of the gift. If the beneficiary does nothing and lets this “Crummey Power” lapse, your check will then be deemed a gift of a present interest, the annual exclusion applies, and all will rejoice.


A bit complicated, but this little strategy can end up saving your family hundreds of thousands of dollars in estate taxes.  The ILIT is also the foundation towards complex estate planning for business purposes, charitable gifts, or even as a source of family income for generations. Be sure to work closely with a competent estate planning attorney to see if this option is for you.

 Irrevocable Life Insurance Trusts: The Fundamentals
 Irrevocable Life Insurance Trusts: The Fundamentals


Scott R. Zucker, Esq. is the owner of The Zucker Law Firm PLLC, located just outside the Capital Beltway in Annandale, within five miles of the City of Fairfax, the county seat of beautiful Fairfax County, Virginia. The firm focuses mainly on estate planning services for Virginia, Maryland and Pennsylvania clientele, and seeks to do so in an affordable and approachable way. People interested in learning more can contact Scott by phone or email.

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