What Is Irrevocable Life Insurance Trust (ILIT)?
A trust specifically designed to own a life insurance policy, removing the death benefit from the insured's taxable estate while providing structured distribution of proceeds to beneficiaries.
Understanding Irrevocable Life Insurance Trust (ILIT)
An irrevocable life insurance trust (ILIT) is a specialized trust created to own one or more life insurance policies on the grantor's (insured's) life. By transferring ownership of the policy to the ILIT, the insured no longer has incidents of ownership, which removes the death benefit from their taxable estate for federal estate tax purposes. The ILIT is "irrevocable," meaning the grantor cannot modify, amend, or revoke the trust once it is established (with limited exceptions). The trustee manages the trust, pays premiums, and distributes proceeds according to the trust document.
ILITs serve multiple estate planning functions beyond estate tax reduction. They provide asset protection for the death benefit proceeds, as assets held in an ILIT are generally shielded from the beneficiaries' creditors. The trust document can specify detailed distribution instructions, such as staged distributions at certain ages, provisions for education, or restrictions on spending. This is particularly valuable for beneficiaries who may be minors, financially inexperienced, or have special needs.
The typical ILIT funding mechanism works as follows: the grantor makes annual gifts to the trust (subject to gift tax considerations and Crummey powers), and the trustee uses those funds to pay the life insurance premiums. When the insured dies, the death benefit is paid to the ILIT tax-free, and the trustee distributes the proceeds to the trust beneficiaries according to the trust terms. For the estate tax exclusion to be effective, the policy must have been owned by the ILIT for more than three years before the insured's death, or the policy must have been originally purchased by the ILIT.
Properly designed ILITs require careful coordination among the grantor, the trustee, the estate attorney, the CPA, and the agents in our network. The trustee must act independently of the grantor and follow specific procedures including paying premiums from trust assets (not the grantor's personal funds), sending Crummey notices to beneficiaries each year, maintaining trust accounting records, and ensuring the trust's tax filings are accurate. Common ILIT structures include single-life ILITs (covering one insured), survivorship ILITs (covering two insureds and paying upon the second death, often used for spouses), and dynasty ILITs (designed to benefit multiple generations under Tennessee's favorable perpetuities laws). Guarantees on life insurance policies held in ILITs are backed by the financial strength and claims-paying ability of the issuing insurance carrier.
Important Things to Know
An ILIT owns the life insurance policy, removing the death benefit from the insured's taxable estate when properly structured.
The trust is irrevocable and cannot be modified or revoked by the grantor once established (with limited exceptions).
Provides asset protection for death benefit proceeds from beneficiaries' creditors and divorce claims.
The policy must be owned by the ILIT for more than three years before death for estate tax exclusion under IRC Section 2035.
Premium payments are made through annual gifts to the trust, typically utilizing Crummey powers to qualify for the annual exclusion.
The trustee must act independently of the grantor and follow proper procedures including annual Crummey notices.
Common ILIT structures include single-life, survivorship (second-to-die), and dynasty ILITs designed for multi-generational planning.
Tennessee's 360-year perpetuities rule and trust decanting provisions make it one of the most favorable jurisdictions for ILITs.
Seeing Irrevocable Life Insurance Trust (ILIT) in Practice
Illustrative example: A 55-year-old Brentwood business owner with a $20 million estate creates an ILIT and the trust purchases a new $5 million second-to-die whole life policy on the business owner and spouse. Annual premiums of $50,000 are funded through gifts to the trust, structured with Crummey powers for the three trust beneficiaries (adult children). Because the ILIT owns the policy from inception, there is no three-year lookback issue. Upon both deaths, the $5 million death benefit is paid to the ILIT free of estate tax and income tax. The trustee distributes proceeds according to the trust terms: one-third at age 30, one-third at 35, and the remainder at 40. Without the ILIT, the $5 million could have been subject to up to $2 million in federal estate tax. This example is illustrative only; actual estate tax savings depend on the size of the estate and current tax law. In a second illustrative scenario, a 70-year-old Nashville widow transfers her existing $1.5 million whole life policy via absolute assignment to a newly created ILIT to remove the death benefit from her taxable estate. The transfer is subject to the three-year lookback rule under IRC Section 2035, meaning she must survive at least three years from the transfer date for the estate tax exclusion to take effect. To mitigate the lookback risk, her estate plan also includes a backup approach: if she dies within three years, an existing $500,000 term policy would provide partial estate liquidity. After she survives the three-year period, the full $1.5 million death benefit will pass tax-free to her grandchildren via the ILIT. Actual outcomes depend on current law and individual circumstances.
Irrevocable Life Insurance Trust (ILIT) in Tennessee
Tennessee is an excellent jurisdiction for establishing ILITs due to its favorable trust laws. Tennessee allows dynasty trusts with a 360-year rule against perpetuities (or potentially longer under certain trust structures), enabling wealth to be protected across multiple generations. Tennessee has no state income tax, no estate tax, and no inheritance tax, compounding the benefits of ILIT planning. The Tennessee Investment Services Act provides additional protections for trust assets. Under TCA Title 56, life insurance policies held in ILITs established in Tennessee must comply with state insurance regulations. In practice, agents in our network frequently collaborate with Tennessee estate planning attorneys on ILIT strategies for affluent families. This includes selecting A-rated (A.M. Best) carriers with strong financial stability for long-term policy commitments, designing the policy structure (whole life vs. universal life vs. survivorship), coordinating premium funding schedules with annual exclusion gifting strategies, and ensuring policy ownership and beneficiary designations align with the trust document. Tennessee residents and non-residents alike often establish ILITs in Tennessee specifically to take advantage of the state's combination of long perpetuities, no state transfer taxes, and favorable trust modernization statutes including trust decanting under TCA 35-15-816(b)(27). Guarantees are backed by the financial strength and claims-paying ability of the issuing insurance carrier.
Explore Irrevocable Life Insurance Trust (ILIT) in Detail
Get answers to specific questions about irrevocable life insurance trust (ilit).
Related Glossary Terms
Estate Tax
A federal tax imposed on the transfer of a deceased person's estate when the total value exceeds the applicable exemption amount, which can be mitigated through life insurance and trust planning.
Read Definition →Gift Tax
A federal tax on the transfer of property or assets from one person to another during their lifetime without receiving full value in return, relevant to life insurance premium payments and policy transfers.
Read Definition →Annual Exclusion
The maximum amount that can be gifted to any individual each year without incurring gift tax or reducing the lifetime gift and estate tax exemption, currently approximately $18,000 per recipient.
Read Definition →Irrevocable Beneficiary
A beneficiary designation that cannot be changed or removed by the policy owner without the written consent of the named beneficiary.
Read Definition →Frequently Asked Questions About Irrevocable Life Insurance Trust (ILIT)
No. If the grantor (insured) serves as trustee of the ILIT, they retain incidents of ownership, which defeats the purpose of the trust by keeping the death benefit in the taxable estate. A common choice is to name a trusted family member, a corporate trustee, or an independent third party as trustee.
You can transfer an existing policy to an ILIT through an absolute assignment. However, there is a three-year lookback rule: if the insured dies within three years of the transfer, the death benefit is pulled back into the taxable estate. For this reason, many estate planners recommend having the ILIT purchase a new policy rather than transferring an existing one.
Generally, no. An ILIT is irrevocable by design. However, some ILITs include limited modification provisions, such as trust protector powers or decanting provisions that allow certain changes under specific circumstances. Tennessee law allows trust decanting under TCA 35-15-816(b)(27), which provides some flexibility for ILITs established in Tennessee.
Tennessee offers no state income tax, no estate tax, no inheritance tax, favorable trust duration rules (360-year perpetuities period), directed trust statutes, trust decanting provisions, and strong asset protection laws. These factors make Tennessee one of the most advantageous jurisdictions in the country for establishing and administering ILITs.
The grantor makes annual gifts to the ILIT, and the trustee uses those gifts to pay the life insurance premiums directly to the carrier. The grantor should not pay premiums directly to the carrier on behalf of the ILIT, as this could be deemed an incident of ownership. The trustee should send Crummey notices to beneficiaries each time a contribution is made to qualify the gifts for the annual exclusion. Maintaining proper trust accounting records is essential.
When the insured dies, the carrier pays the death benefit to the ILIT, which becomes the trust corpus. The trustee then administers the funds according to the trust document, which may include immediate distributions, staged distributions over time, or ongoing trust administration for multiple generations. The trust may continue for decades or centuries depending on its design and Tennessee's perpetuities laws.
Have Questions About Life Insurance?
Connect with a licensed Tennessee agent in our network for personalized guidance. Free consultation, no obligation.
Get Your Free Quote