Understanding ILITs in 2025: Still a Powerful Estate Planning Tool

In a world where tax laws shift like the wind, one tool has remained remarkably steady in the estate planning toolbox: the Irrevocable Life Insurance Trust, or ILIT. While the ultra-wealthy have long used ILITs to reduce estate taxes, recent trends and upcoming changes in tax law make this strategy increasingly relevant for middle and upper-middle-class families too.

This post explores what an ILIT is, when it makes sense, when it doesn’t, and how new developments—including the 2026 estate tax exemption rollback—may impact your decision to use one.

What Is an ILIT?

An Irrevocable Life Insurance Trust (ILIT) is a trust specifically designed to own a life insurance policy outside of your taxable estate. You fund the ILIT with cash (usually annually), and the trustee uses those funds to pay premiums on a life insurance policy. Upon your death, the death benefit passes estate-tax-free to your beneficiaries, providing liquidity and generational wealth.

Because it’s irrevocable, you can’t take the money back or change the terms once it’s set up—but that’s also what makes it so effective at removing the policy from your taxable estate.

Why Consider an ILIT Now?

The estate tax exemption is currently $13.61 million per person in 2025, but it is scheduled to be cut in half in 2026 unless Congress acts. That means many families who were previously “safe” from estate taxes could suddenly find themselves with a taxable estate. For example, if you own a home, retirement accounts, and life insurance, it’s not difficult to reach $6–7 million in total assets. ILITs help reduce your taxable estate, ensuring more of your wealth passes to your loved ones instead of the IRS.

Benefits and Drawbacks of an ILIT

One of the biggest advantages of using an ILIT is that it removes the life insurance proceeds from your taxable estate. This can provide tax-free liquidity for estate settlement costs or to equalize inheritances among your heirs. Additionally, the trust structure can include asset protection features, shielding proceeds from creditors or divorcing spouses. And when designed properly, an ILIT allows you to transfer wealth efficiently using the annual gift tax exclusion.

However, ILITs are not for everyone. If you expect to need access to the policy’s cash value, or if you want the flexibility to change beneficiaries in the future, the irrevocable nature of an ILIT may not be appropriate. Similarly, if your estate is well below the exemption—even after the 2026 sunset—you may not benefit enough from the added complexity.

Understanding Crummey Notices and Gift Tax Rules

Funding an ILIT with premium payments can trigger gift tax concerns. However, Crummey Notices provide a powerful solution. A Crummey Notice is a written notification sent by the ILIT trustee to beneficiaries, giving them a temporary right to withdraw their share of the gifted funds. This converts the gift into a “present interest,” qualifying it for the annual gift tax exclusion, which is currently $18,000 per person in 2024.

Most beneficiaries never exercise their withdrawal rights, allowing the funds to remain in the trust and be used to pay premiums. But it’s essential that the notice be sent in writing and that trustees maintain documentation each year. Failure to follow these steps can result in the IRS treating the gift as a future interest, disqualifying it from the annual exclusion and forcing the use of your lifetime exemption.

For example, if you contribute $36,000 to the ILIT for a policy premium and have two children as beneficiaries, the trustee would send each a Crummey Notice informing them of their $18,000 withdrawal right. If they don’t withdraw it within the designated period—usually 30 days—the gift qualifies for the annual exclusion.

Transferring an Existing Policy vs. Starting Fresh

If you already own a life insurance policy, you may wonder if it can simply be transferred to the ILIT. You can—but there are consequences to consider.

Transferring an existing policy is often convenient, especially if your health has declined and you wouldn’t qualify for new coverage. However, the IRS considers this a gift equal to the policy’s value (typically the interpolated terminal reserve or cash surrender value). This gift requires filing Form 709 and may use up part of your lifetime exemption. Additionally, if you die within three years of the transfer, the death benefit is pulled back into your taxable estate under IRC §2035.

Alternatively, having the ILIT apply for and purchase a new policy avoids both the three-year rule and the gift of the policy itself. Annual premium payments can still qualify for the annual exclusion if handled correctly with Crummey Notices. However, this route does require underwriting and may not be viable if your health has changed.

A Real-World Case Study

Pamela, age 62, owns a $2 million whole life insurance policy with $150,000 in cash value. She wants to remove the policy from her taxable estate by placing it into an ILIT. She has two options.

If she transfers the policy, she must report a $150,000 gift and hope to survive three more years so the full death benefit is excluded from her estate. If she instead has the ILIT apply for a new policy, no immediate gift is triggered (aside from premium gifts), and she avoids the three-year rule altogether. Because Pamela is in good health and values simplicity, she chooses the latter approach and protects the future death benefit from estate tax.

Final Thoughts

An ILIT is a powerful tool—but only if implemented correctly. Crummey Notices must be sent and documented every year, gift reporting must be accurate, and the trust structure must be managed with care. Whether you're planning for generational wealth or simply trying to avoid estate tax surprises in 2026, an ILIT deserves a closer look.

As always, thoughtful planning and proper execution are key. Let’s talk about whether an ILIT fits into your long-term strategy—and how to make sure it works the way you intend.

If you need help with ILIT setup or Crummey Notice tracking, our firm can guide you through the process, ensure legal compliance, and help you stay ahead of shifting tax laws.