Your ILIT Guide: How to Capitalize on ILITs Ahead of 2026
More Folks Are Setting Up ILITs & Other Trusts Ahead of 2026. Find Out Why.
Irrevocable life insurance trusts (ILITs) could be uniquely advantageous and offer greater peace of mind if set up before Jan. 1, 2026. That’s because ILITs may provide a more effective way of reducing the value of an estate and preserving life insurance benefits while federal estate tax exemptions remain at their current rates.
Within two years, however, those higher rates could disappear, as lifetime estate tax exemptions are on track to drop by roughly half in 2026 if nothing changes between now and then.
With that, the options for mitigating federal estate taxes and protecting assets like life insurance payouts could be far more limited — and possibly less attractive.
Here’s why, with a closer look:
This ILIT guide explains the ins and outs, pros and cons, and general uses of irrevocable life insurance trusts in less than 3 minutes to get anyone up to speed with this estate planning option.
What Are Irrevocable Life Insurance Trusts (ILITs)?
ILITs are tax-savvy trusts that are designed to own life insurance policies and that cannot be altered once set up. Typically, irrevocable life insurance trusts are created by individuals or spouses (the “grantors”) to:
- Hold at least one life insurance policy: The ILIT can buy, manage, and own a life insurance policy, paying premiums from the trust’s funds. Any death benefits from the policy owned by the ILIT would be paid out to the trust. With that, ILIT assets can be shielded from creditors and/or divorce, ensuring they remain available for the designated beneficiaries.
- Remove the life insurance policy and its proceeds from an estate: As part of the ILIT, life insurance could be excluded from an estate. That, in turn, could lower the overall value of the estate and reduce any associated estate taxes. Therefore, as part of a comprehensive estate plan, an ILIT could mitigate estate tax obligations, possibly even zeroing them out, while serving as a probate mitigation strategy.
- Leverage existing gift and estate tax exemptions: Cash transfers to ILITs could constitute a gift, and larger cash gifts can be made to these trusts before 2026 (after which time gift and estate tax exemptions will likely revert to their pre-2017 levels, adjusted for inflation). In 2023, the gift tax exclusion was $17,000 while the federal estate tax exemption for individuals was $12.92 million; in 2024, those numbers increase to $18,000 and $13.61 million, respectively (here are the numbers for 2025). By 2026, however, the estate tax exemption could decrease to ~$6 million or $7 million.
- Possibly avoid estate tax exclusions and gift tax exemptions entirely: Depending on how ILITs are set up, it may be possible to fund these trusts without bringing gift and estate tax exemptions into play. That could open up even more flexibility in terms of estate planning strategies and leveraging the higher estate tax exclusions available until Dec. 31, 2025.
For these and other reasons, ILITs tend to serve as a vital component of many estate plans, offering:
- Grantors more control over how the proceeds of life insurance policies are distributed
- Beneficiaries more liquidity, giving them access to life insurance benefits without having to wait for probate and without more of those benefits going to taxes.
With that framework, many people use irrevocable life insurance trusts to transfer death benefits to spouses, children, grandchildren, and/or other loved ones.
How Do ILITs Work?
Irrevocable life insurance trusts generally only exist for the purposes of owning and managing life insurance policies and, eventually, distributing the proceeds from those policies. Consequently, ILITs are not like any other trust, and they can be used in conjunction with other trusts, like IDGTs and GRATs, to achieve various estate planning goals.
Here’s a simplified breakdown of how ILITs work:
- A grantor (you) creates an ILIT: When you set up an irrevocable life insurance trust, you’ll designate a trustee to oversee the business of the trust. The trustee will need to be someone other than you. You’ll also need to name beneficiaries and detail the terms of asset distribution. Since ILITs cannot be changed once they are set up, be careful in how you create these trusts, ideally taking this step with the help of an experienced trust lawyer.
- The ILIT is funded: Once the trust has been created, you’ll need to make a gift or transfer assets to the ILIT, so it’s fully funded. If you gift cash to the trust, the ILIT can use that cash to take out a life insurance policy and, subsequently, cover the monthly premiums for that policy. If you transfer an existing life insurance policy into the trust, a three-year “survival” rule could come into play, meaning you’ll need to live for at least three years after the policy has been transferred into the trust in order for the proceeds to be excluded from your estate.
- The trustee pays the insurance premiums: Using assets held by the trust, the trustee will be responsible for the “upkeep” of the life insurance policy, which means paying the monthly premiums to keep the policy active. Along with this, the trustee is also generally responsible for any other administrative work of the trust.
- The life insurance payouts bypass the estate: When you pass away, the proceeds from your life insurance policy held by the ILIT will be paid out to the trust via the trustee. With that, those death benefits don’t become part of your estate, and they’re not the trustee’s. Instead, those benefits are held by the trust, allowing them to bypass probate and be distributed according to the designated beneficiaries, according to the terms of the trust.
Due to this setup, irrevocable life insurance trusts have been a go-to device for:
- Purchasing and holding life insurance policies: Without an ILIT in place, these policies and their benefits could be included in a decedent’s estate. Depending on the amount of the policy, that could mean an estate tax rate as high as 40% applies.
- Preserving life insurance proceeds for beneficiaries: Beneficiaries can obtain distributions while the ILIT assets remain out of reach from creditor claims and divorce judgments. This includes both claims and judgments affecting the grantor and their beneficiaries.
- Establishing some thoughtful guardrails for how life insurance benefits should be used in the future: Without these measures, the proceeds from life insurance could be drained before essential safeguards are put in place.
As powerful as irrevocable life insurance trusts can be, they are not cookie-cutter solutions that work or look exactly the same for everyone or every estate plan. That’s because ILITs are complex trusts associated with various rules and requirements. Missing the mark with these details can mean losing out on some or all of the potential advantages that irrevocable life insurance trusts may have to offer.
What Assets Can Fund ILITs?
Irrevocable life insurance trusts (ILIT) can be funded with:
- Cash: The grantor can make a one-time cash gift or money transfer. Alternatively, annual cash gifts or transfers can be made to cover a year’s worth of life insurance premiums.
- Individual and group policies: The policy for a single individual or a group of covered individuals can be held by an ILIT. Similarly, one trust can be designed to own and manage several policies or a single policy, including a second-to-die life insurance policy (meaning the policy only pays out after the second insured person, usually a spouse, passes away).
- Term or permanent life insurance: While term life insurance policies offer coverage for a fixed amount of time, like 10 or 20 years, permanent life insurance provides coverage until death. Both types of life insurance policies can be held by ILITs.
- Existing or new policies: Current life insurance policies can be transferred into a newly set up ILIT, and the trustees who oversee these trusts can be charged with taking out a new life insurance policy, using the funds of the trust.
When funding ILITs, other key considerations include the:
- Inability to “take back” assets: ILITs are irrevocable, so grantors cannot regain or reclaim ownership of the assets used to fund an irrevocable life insurance trust. Once gifted or transferred to the trust, assets become the trust’s property to manage, according to the terms of the trust documents.
- Gifting versus transfer strategies: There can be strategic advantages to funding ILITs with gifts versus asset transfers, and this doesn’t have to be an either-or choice. Grantors can fund irrevocable life insurance trusts with a combination of gifts and asset transfers. Their needs and objectives can impact the ideal balance here, both for initial trust funding and to fund the trust on an ongoing basis.
Why Should I Set Up an ILIT Before 2026?
Creating an irrevocable life insurance trust before Jan. 1, 2026, could yield some key benefits, like (but not limited to):
- Estate tax mitigation: Thousands or more could be used to fund one or more irrevocable life insurance trusts. With that, the cash to buy and maintain life insurance policies and the death benefits themselves can be removed from the value of the taxable estate. So, if you have multiple life insurance policies for $1 million or more and those fund ILITs, you could reduce the value of your estate by millions, bringing any estate tax obligations down to the minimum; for some, that could even be zero.
- Millions more in current exclusions: ILITs won’t go away when 2026 rolls around, but millions in estate tax exclusions will be gone for good (unless Congress passes new laws before existing exemptions sunset). That could mean at least $6 million more to leverage over the next 24 months, with plenty of room to set up comfortably funded ILITs for any number of beneficiaries.
- The 3-year rule: If you plan to fund an ILIT with an existing life insurance policy, you’ll need to survive the transfer by three years if you want the death benefits to be removed from your estate. If you don’t (i.e., you pass away inside of 3 years of funding the ILIT with an existing life insurance policy), the value of the policy or the death benefits can be included in your estate. This rule was set up by the Internal Revenue Service (IRS), and it does not apply when grantors sell assets to a trust.
Those are just some advantages of setting up an irrevocable life insurance trust before Dec. 31, 2025. Others may be available, depending on your circumstances and needs, and you do not have to be ultra-wealthy to really benefit from including an ILIT in your estate plan.
What Should I Consider Before Setting Up an ILIT?
Irrevocable life insurance trusts may be a prudent option for you, your loved ones, and your estate plan. Before you set up and fund an ILIT, however, consider the following:
- ILITs are complex and irrevocable: Irrevocable life insurance trusts have to be set up, funded, and maintained according to very strict rules. Otherwise, they run the risk of creating more costs, with limited to zero benefits. Similarly, ILITs cannot be changed once set up and funded; in other words, there are no do-overs with ILITs after they’re up and running (this bears repeating). So, it’s usually not in the grantors’ best interests to slap together an ILIT without understanding this device or constructing it with the counsel of an experienced trust attorney.
- A “Crummey letter” may need to be sent: This is an official notice of a gift. A trustee may need to send Crummey letters to beneficiaries to let them know about an ILIT gift and their rights to make withdrawals at any point. Often, beneficiaries are asked to not exercise these rights; if they agree, they usually do so via signature.
- Grantors shouldn’t be ILIT trustees: With irrevocable life insurance trusts, the grantor won’t maintain direct control over the trust or its assets. That responsibility, instead, lies with the trustee, who must be someone other than the grantor(s). Specifically, if parents or spouses set up an ILIT, those parties cannot also name themselves as trustees. If they do, they could negate some of the benefits of setting up these trusts, as the holdings would likely end up being included in their estate (instead of being removed from it).
- ILIT trustees should be selected with care: Responsible for maintaining and, sometimes, taking out life insurance policies, ILIT trustees will have various duties to fulfill, and these can last years, depending on the trust and the grantor(s). Consequently, ILIT trustees should be dependable individuals, and they may partner with experienced professionals, like lawyers and CPAs, to administer the trust, distribute death benefits, and more.
These and other considerations can shed more light on whether an irrevocable life insurance trust (or another one) may make a sensible update to your estate plan. So can a seasoned Austin trust attorney at TAW Law Texas.
Our team has deep experience devising and administering irrevocable life insurance trusts, and we are ready to explain more about ILITs, so you can make the best choice for you and your loved ones.
How Can I Find Out More About ILITs?
Contact TAW Law Texas for a free, confidential, no-obligation consultation with top-rated estate planning attorneys in Austin, Texas. Simply, email us or call 512-827-9212 now.
Devoted to delivering extraordinary counsel and exceptional value, our Austin lawyers provide comprehensive estate planning and probate services throughout Travis County. From creating and administering trusts to contesting wills, probate litigation, flat-fee uncontested probate, and beyond, you can rely on TAW Law Texas for optimal solutions, strategic counsel, and lasting peace of mind.
Todd A. Wilson
Todd A. Wilson has been practicing law since 2007, with the aim of educating all strata of society and sharing crucial insights about the importance of estate planning, probate, and more.
The Law Office of Todd A. Wilson (also known as TAW Law TX) offers affordable estate planning and probate services.
*Header image features attorney and non-attorney staff at TAW Law Texas.