Insurance + Estate Planning
Irrevocable Life Insurance Trust (ILIT)
Your life insurance policy could be subject to a 40% estate tax. An ILIT removes the death benefit from your taxable estate, providing your family with tax-free liquidity exactly when they need it most.
Understanding the Basics
What Is an ILIT?
An Irrevocable Life Insurance Trust (ILIT) is an irrevocable trust that owns and is the beneficiary of a life insurance policy on your life. Because the trust, not you, owns the policy, the death benefit is not included in your taxable estate when you die. This can save your heirs hundreds of thousands or even millions in estate taxes.
Without an ILIT, life insurance proceeds payable to your estate or over which you hold "incidents of ownership" are included in your gross estate for federal estate tax purposes. A $5 million life insurance policy owned by you could cost your heirs $2 million in estate taxes at the 40% rate. An ILIT eliminates this tax entirely.
The ILIT can be funded by making annual gifts to the trust, which the trustee uses to pay insurance premiums. These gifts qualify for the annual gift tax exclusion through the use of Crummey notices, which give beneficiaries a temporary right to withdraw the gift. When the insured person dies, the death benefit is paid to the trust and distributed to beneficiaries according to the trust terms, completely free of income and estate tax.
Is It Right for You?
Who Is an ILIT For?
Families With Large Life Insurance Policies
If your life insurance death benefit, combined with your other assets, pushes your estate over the federal estate tax exemption, an ILIT removes the insurance from your estate and saves up to 40% of the death benefit in estate taxes.
Estate Tax Liquidity Planning
Families with illiquid estates (real estate, business interests, art) can use an ILIT to provide immediate cash to pay estate taxes without forcing the sale of family assets at distressed prices.
Business Owners With Buy-Sell Agreements
An ILIT can hold insurance that funds a buy-sell agreement, ensuring the surviving business partners have the cash to purchase the deceased partner's interest without including the proceeds in the deceased partner's estate.
CRT Wealth Replacement
Families using a Charitable Remainder Trust can use an ILIT to replace the wealth going to charity. The ILIT provides a tax-free death benefit equal to the charitable gift, so heirs receive the full inheritance.
What You Get
Key Features
Estate Tax Exclusion
Death benefit proceeds are excluded from your taxable estate, eliminating up to 40% in federal estate tax on the insurance payout.
Income Tax-Free Proceeds
Life insurance death benefits are already income tax-free. An ILIT makes them estate tax-free as well, achieving double tax-free status.
Creditor Protection
Because the trust owns the policy, the proceeds are protected from your creditors and your beneficiaries' creditors when distributed through spendthrift provisions.
Crummey Notice Administration
DynastyOS manages the annual Crummey withdrawal notices required to qualify premium gifts for the annual gift tax exclusion.
The Process
How It Works
Create the ILIT
The trust must be established before the insurance policy is purchased or transferred. The trust is the owner and beneficiary of the policy from inception.
Fund Premiums
You make annual gifts to the trust, and the trustee issues Crummey notices to beneficiaries. After the withdrawal period lapses, the trustee pays the insurance premiums.
Policy Matures
When the insured dies, the insurance company pays the death benefit directly to the ILIT, completely outside of the taxable estate.
Distribution
The trustee distributes the tax-free proceeds to beneficiaries according to the trust terms, providing liquidity for estate taxes, debts, or family needs.
Do Not Let Taxes Shrink Your Legacy
Keep 100% of Your Life Insurance Tax-Free
Without an ILIT, up to 40% of your life insurance death benefit could go to the IRS instead of your family. An ILIT ensures every dollar goes where you intend.
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Common Questions
Frequently Asked Questions
Tax-Free Protection for Your Family
An ILIT ensures your life insurance works as hard as you do. Remove it from your estate, protect it from creditors, and deliver every dollar to your family.