Why an ILIT Matters
If you own a life insurance policy when you die, the full death benefit counts in your taxable estate. For a $2 million policy, this could mean $800,000 or more in estate taxes. The current rate is 40%, and this applies if your estate exceeds the federal exemption.
An ILIT removes this exposure. The trust owns the policy and pays premiums using gifts you contribute. It distributes the death benefit to your beneficiaries per the trust's terms. All of this happens outside your estate.
Key Considerations
- You cannot be the trustee of your own ILIT
- Transferring an existing policy to an ILIT triggers a three-year lookback. If you die within three years, the proceeds still count in your estate.
- Premium payments to the ILIT need "Crummey notices" for the annual gift tax exclusion
- ILITs are irrevocable. Once created, the trust terms generally cannot be changed.