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What is an irrevocable life insurance trust (ILIT)?

Written by: New York Life Editorial Team

Reviewed by: New York Life Compliance Team

Updated: August 24, 2026

Planning Essentials  |  Eagle Strategies LLC

Key takeaways

  • ILITs provide a tax-efficient way to transfer wealth to your beneficiaries outside of your taxable estate. 
  • They’re also an effective mechanism for protecting legacy assets from potential creditors.
  • If you have a family member with special needs, an ILIT can help set aside assets for their care without interfering with their eligibility for government benefits.
Two people sitting and talking

What does an irrevocable life insurance trust do?

An irrevocable life insurance trust (ILIT) is a legal arrangement that seeks to minimize your current tax burden as well as the impact taxes will have on your estate. It does this by transferring assets from one party (you) to another (the trust) and uses a life insurance policy to efficiently distribute the proceeds when you pass away.

 

Who can benefit from an ILIT?

Under current federal estate-tax law, the basic exclusion amount is $15 million per individual in 2026. Married couples may be able to combine their exclusions through portability, but this requires proper estate planning and filing. As a result, the federal estate-tax benefits of an ILIT may be most relevant to people with substantial estates, although an ILIT can serve other planning purposes.1

 

How do irrevocable life insurance trusts work?

ILITs are trust structures set up between three legal parties:

  • The grantor – the person who creates and funds the trust.
  • The trustee – the individual or organization that manages the trust and assumes responsibility for paying annual insurance premiums and overseeing trust administration.
  • The beneficiary(ies) – the individual(s) who will receive the trust assets upon the grantor’s death.

By creating an ILIT, you (the grantor) will be removing taxable assets from your estate and transferring them to a separate legal entity (the trust). The trustee (who can be a friend, a relative, or an independent professional) uses these assets to purchase a life insurance policy in your name and will continue to pay the premiums so the policy remains in force. When you die, the policy’s death benefit is paid directly to the trust, which will, in turn, distribute the proceeds to any beneficiaries you have named.

 

Benefits of an irrevocable life insurance trust

ILITs are powerful planning tools that serve as an important wealth transfer mechanism in many well-crafted estate plans. If you are an affluent family with a sizable estate or have a loved one with special needs who will require ongoing care, an irrevocable life insurance trust offers a variety of benefits: 

Tax benefits of ILITs

By removing taxable assets from your current portfolio, an ILIT may help lower your current tax burden.

Estate planning benefits of ILITs

In addition to giving you a tax-efficient way to transfer wealth to your beneficiaries, ILITs may also help with the following:

  1. Asset protection – Although each state has its own rules regarding exactly how much of the insurance policy cash value or death benefit can be protected from creditors, when the policy is held in an ILIT, any excess value above those limits is generally protected from the creditors of both the grantor and the beneficiary. This can be especially beneficial if you or your beneficiaries are in highly litigious professions.
  2. Government benefit protection – For those seeking to provide lifetime care for a family member with special needs, careful estate planning is essential. Using an ILIT can help ensure that inherited assets don’t inadvertently interfere with a beneficiary’s eligibility for government benefits such as Social Security Disability Income or Medicaid. By carefully controlling how distributions from the trust are used, the trustee can ensure that continued benefit eligibility is maintained.

Legacy benefits of ILITs

Since the proceeds of a life insurance policy are considered a financial asset by the government, transferring ownership to a trust can make it easier for your beneficiaries to qualify for Medicaid and other government assistance programs.

 

Are there downsides to irrevocable life insurance trusts?

The only major downside is that ILITs are irrevocable. A revocable trust can be easily modified or terminated because the assets remain your property, but you relinquish control over assets when you gift them to an irrevocable trust. Therefore, the trust cannot be modified without legal action or the consent of the beneficiaries.

 

How do I set up an ILIT?

Since ILITs are complicated legal instruments, it’s important to work with experts in the field to make sure the trust is set up and funded appropriately. Be sure to consult a tax attorney, trust officer, or financial professional to see if an ILIT is the right choice for you.

 

Frequently asked questions

An ILIT may be worth considering if you want to keep life insurance proceeds outside your taxable estate or control how those proceeds are distributed. Since the federal basic exclusion amount is $15 million per individual in 2026, the estate-tax benefits generally apply to larger estates. An estate-planning attorney can help you determine whether an ILIT fits your needs.1

While the trust is the sole beneficiary of the life insurance policy it holds, the beneficiaries of the trust are the people who will ultimately receive the proceeds—your spouse, children, friends, or charities that you name in the trust documents.

One way to fund premium payments is to make gifts to the trust. In 2026, the annual federal gift-tax exclusion is $19,000 per recipient. To qualify for the exclusion, beneficiaries generally receive a temporary right to withdraw the contribution, commonly communicated through “Crummey notices.” The trustee may then use funds that aren’t withdrawn to pay the policy premiums.2

This rule applies only if you transfer an existing insurance policy to an ILIT. If that’s the case and you happen to pass away within three years of transferring the policy to the trust, the IRS will require that any proceeds be included in your estate for estate tax purposes.

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In light of the uncertain future of estate tax exemptions and rates, now may be an opportune time to determine whether an ILIT might benefit your overall financial plan.*

Talk to your Eagle Strategies Financial Advisor or get connected today.

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*Eagle Strategies LLC (Eagle) is an SEC-registered investment adviser. Registration with the SEC does not imply a certain level of skill or training. Eagle investment adviser representatives (IARs) act solely in their capacity as insurance agents of New York Life, its affiliates, or other unaffiliated insurance carriers when recommending insurance products and as registered representatives when recommending securities through NYLIFE Securities LLC (member FINRA/SIPC), an affiliated registered broker-dealer and licensed insurance agency. Eagle Strategies LLC and NYLIFE Securities LLC are New York Life Companies. Investment products are not guaranteed and may lose value. No tax or legal advice is provided by Eagle, its IARs, or its affiliates.

1What's new — Estate and gift tax
https://www.irs.gov/businesses/small-businesses-self-employed/whats-new-estate-and-gift-tax

2IRS releases tax inflation adjustments for tax year 2026, including amendments from the One, Big, Beautiful Bill
https://www.irs.gov/newsroom/irs-releases-tax-inflation-adjustments-for-tax-year-2026-including-amendments-from-the-one-big-beautiful-bill