Irrevocable Life Insurance Trust: Everything You Need to Know

Note: Ethos does not offer an irrevocable life insurance trust, although you may be interested in our term and whole life insurance products. This information is shared to help our customers make an informed decision about their life insurance needs.

An irrevocable life insurance trust (ILIT) allows you to place your life insurance policy into a trust, so your chosen beneficiaries don't have the death benefit added to any potential estate taxes. This unique tool in estate planning can lower the tax burden on surviving beneficiaries, but as the name suggests, it also comes as an irrevocable decision.

What is an irrevocable life insurance trust?

Designed as a wealth management tool, an irrevocable life insurance trust holds a life insurance policy in a trust. But what does that mean for you and your loved ones? 

Upon the insured's passing, proceeds from the life insurance policy placed into the trust get paid into the trust's account. By paying the death benefit into a trust, it excludes any cash from the death benefit from getting added to the insured's estate, therefore not counting toward potential estate taxes. 

In accordance with federal law, estates are taxed upon the owner's passing. This could include businesses owned by the deceased, real estate or other non-liquid holdings — even if 2022 exemptions mean that only estates valued at over $12.06 million are subject to the tax. 

Rules are changing, though, as the exemption designation falls off in 2025 and drops the amount to $5 million. 

Some states have even stricter limitations, with amounts as low as $1 million in total assets triggering an estate tax. Proceeds from a life insurance policy placed into an ILIT don't get added to the estate total, helping some estates avoid the estate tax. 

The insured must transfer ownership of the policy into the trust, which means the insured no longer has the right to make changes to the policy or the trust, leaving it in the hands of the appointed trustee. 

What are some benefits of an irrevocable life insurance trust?

• An irrevocable life insurance trust offers a tax-free death benefit. 
• An ILIT isn't limited to one life insurance policy and can have multiple policies associated with the trust. 
• Your beneficiaries receive protection from estate taxes on the cash benefit. 
• Via the trust, you can direct how the death benefit is used -- for example, to help support an existing business or create a charitable gift to an organization -- or designate someone to receive the benefits of the ILIT. 
• Using an ILIT can help ensure cash is in hand to allow your beneficiaries to pay off estate taxes or other expenses, especially if your high-value assets aren't liquid. 
• The irrevocable life insurance trust can also protect your death benefit from creditors, probate, and divorce. 
• An ILIT can help manage money for a beneficiary who may need assistance in managing the proceeds of a cash death benefit, such as a minor or someone with special needs. 

Who should consider an irrevocable life insurance trust?

The benefits of an irrevocable life insurance trust span various situations, making an ILIT worth considering for anyone looking to avoid additional estate taxes or with specific plans for the death benefit on their life insurance policy.

What else should I know about an irrevocable life insurance trust?

A trust can be a complicated process. An irrevocable life insurance trust requires legal documentation for the IRS and annual maintenance, including tax returns and letters. 

Knowing the obligations ahead of forming an ILIT will help manage expectations. 

What if I already have a life insurance policy?

If you already have a life insurance policy, you can transfer it into an irrevocable life insurance trust. It'll take some management to change the beneficiary to the ILIT, and the shift likely includes a three-year waiting period. If the insured dies within that window, the proceeds from the life insurance death benefit can still get included in the estate. 

If you're on the hunt for life insurance online, Ethos has the perfect tool for you to get a quote fast. 

How do you choose a beneficiary for an irrevocable life insurance trust?

For legal purposes, both the life insurance policy's owner and beneficiary are the irrevocable life insurance trust. Still, the trust can be managed by the people you've chosen. The trustee overseeing your ILIT can be someone from a bank, an accountant or lawyer, a spouse, or a trusted friend. There are rules to manage the amount of money a sole trustee can remove from a trust, so carefully consider your options for selecting a trustee and spell out your plans for the death benefit and the beneficiaries during the trust creation.