What is an irrevocable life insurance trust (ILIT) and how does it work?

An irrevocable life insurance trust (ILIT) is a legal structure that owns a life insurance policy outside of your personal estate. Because you no longer own the policy directly, the death benefit is excluded from your taxable estate—a significant advantage for high-net-worth individuals.

Here's how it works: You establish the trust and appoint a trustee. The trust owns and is the beneficiary of the life insurance policy. Each year you make gifts to the trust (within annual gift tax exclusion limits, currently $18,000 per beneficiary in 2024), and the trustee uses those funds to pay premiums. Upon your death, the trust receives the death benefit tax-free and distributes proceeds to your named trust beneficiaries.

The "irrevocable" aspect is important—once established, you cannot change the trust terms or reclaim ownership. Proper Crummey withdrawal notices must be sent to trust beneficiaries annually to qualify gifts for the annual exclusion.

ILITs are sophisticated planning tools requiring coordination between a licensed insurance agent and an experienced estate planning attorney. Nevada's favorable trust laws make it a particularly effective jurisdiction for trust formation.