Updated August 7, 2026. Quick answer: an irrevocable life insurance trust exists to solve one problem — the policy you own is counted in the estate it was bought to help pay. An ILIT owns the policy instead of you, so the proceeds land outside your estate. And for most households in 2026 it is unnecessary, which is the part the structure is rarely sold with.
The problem it solves
Under 26 U.S.C. §2042, life insurance proceeds are in your gross estate if they are receivable by your executor, or if you held “any of the incidents of ownership” at death. Owning the policy is the plainest incident there is.
So a policy bought to provide liquidity for estate tax can enlarge the estate that is being taxed. An ILIT breaks that loop: the trust applies for and owns the policy, the trust is the beneficiary, and you are neither. The inclusion mechanics in full.
The three-year rule, which catches the obvious shortcut
The obvious move is to transfer an existing policy into a trust. §2035(a) anticipates it. Where the decedent “made a transfer… of an interest in any property, or relinquished a power with respect to any property, during the 3-year period ending on the date of the decedent’s death”, and the property “would have been included in the decedent’s gross estate under section 2036, 2037, 2038, or 2042” had it been retained, the value comes back into the gross estate.
Section 2042 is named in that list explicitly. Transfer a policy to an ILIT and die within three years and the proceeds are taxed as if you had never transferred it — the trust remains, but the exclusion does not.
The consequence for how these are done: where an ILIT is genuinely wanted, having the trust apply for and originate a new policy avoids the three-year problem entirely, because there is no transfer to claw back. Moving an existing policy is the version that carries the risk, and it is the version people reach for first.
When it is overkill — said plainly
The federal basic exclusion amount is $15,000,000 per person for 2026. An ILIT is machinery for a problem most estates do not have, and it costs something real: it is irrevocable, it needs its own administration, premiums must be funded through it, and gift-tax mechanics attach to those contributions (the Crummey-notice discipline).
Before considering one, check whether there is an estate-tax exposure at all — and note the exposure is more often at state level: several states tax estates far below the federal threshold, and that is where an ILIT can earn its keep for an otherwise ordinary estate.
If the answer is that no tax is in prospect, the honest recommendation is to stop here, and to ask the prior question instead: whether the policy is needed at all.
If it is warranted, the mechanics that matter
- The trust should own the policy from the start where possible — see the three-year rule above.
- You cannot keep control. Retained powers are incidents of ownership; an ILIT that you can amend or borrow against is not doing the job it exists for.
- Premiums are funded by gifts to the trust, which is why the Crummey-notice routine exists — it is administration that has to actually happen, year after year.
- Name the trust correctly on the policy, and check it. A beneficiary designation naming your estate instead undoes the plan: designations override the will, and the wrong one overrides your intentions too.
We sell no insurance, draft no documents, and take no commission. Everything on this page is a mechanism, not a product recommendation.
Sources
26 U.S.C. §2042 and §2035(a), read at the Legal Information Institute on 2026-08-07. The 2026 federal basic exclusion amount is tracked in our claims register and re-checked against the annual IRS release.
Honest gap. This page explains what an ILIT does and when it is unnecessary. It does not draft one, does not cover generation-skipping allocation, split-dollar arrangements, or the detailed gift-tax treatment of contributions, and it does not address state-law trust variations. An ILIT is irrevocable — it is a decision to take advice on, not one to arrange from a web page.
See methodology and corrections. General information about published law, not legal or tax advice. No advertising appears on this page and we earn nothing from it.