ILIT: How an Irrevocable Life Insurance Trust Works in 2026

Written and reviewed by Hans Goldstein, licensed insurance producer, NPN 20602398 · CA Insurance License #4273294
Last reviewed October 3, 2026 · Published October 3, 2026

Why life insurance ends up in your estate

If you own a policy on your own life, or hold any "incident of ownership" (the right to change the beneficiary, borrow, surrender), the death benefit is included in your gross estate (IRC §2042). The death benefit is generally income-tax-free to your beneficiaries under IRC §101(a), but income tax is not estate tax. For a large estate, a $5 million policy can add $2 million of estate tax at the 40% top rate (IRC §2001). An ILIT is a trust that owns the policy instead of you, so the proceeds pass outside the estate.

The 2026 numbers that decide whether you need one

Federal estate, gift and GST figures, 2026

The One Big Beautiful Bill Act (P.L. 119-21) set the $15 million figure with no sunset (CRS). California has no estate or inheritance tax, so for most California clients the federal line is the test. Details on the 2026 exemption and the 2027 outlook.

Who an ILIT fits in 2026

• Projected over the federal line at death. Grow today's net worth forward. A 55-year-old couple at $15 million growing 5% a year passes $30 million in about 14 years. That is the projection that matters, not today's balance sheet. Run yours in the ILIT estate tax calculator.
• State estate tax exposure. Residents of, or owners of real property in, states with low thresholds: Oregon ($1,000,000, ORS 118.010 (Oregon estate tax)), Massachusetts ($2,000,000, Massachusetts DOR estate tax guide), Minnesota ($3,000,000) and Washington ($3,000,000 for deaths on or after 7/1/2026, rates 10 to 20%, RCW 83.100.040 (Washington estate tax)). A California resident with a Washington or Oregon vacation home can owe that state's tax on the property.
• Non-tax reasons, at any net worth: creditor and divorce protection for heirs, spendthrift terms, cash so heirs do not have to sell a business, farm or building under pressure, equalizing inheritances when one child gets the business, blended families, and special-needs beneficiaries.

How premiums get into the trust: Crummey powers

You fund the trust with gifts, and the trustee pays the premium. A gift to a trust is normally a future interest that does not qualify for the $19,000 annual exclusion. A Crummey power fixes that: each beneficiary gets a temporary right to withdraw the gift, which makes it a present interest. The trustee sends written notice for each contribution, gives a real window (30 days is common practice) and keeps records.

More beneficiaries means more room. Each Crummey holder supports up to $19,000 per donor per year. A married couple with 3 children can move $114,000 a year into the trust. Add 3 in-law spouses and 6 grandchildren (12 holders) and the couple's annual exclusion room is $456,000.

The premium is the gift, so design the policy with the gifting plan

Every premium the trust pays is a gift from you. Premium above your Crummey budget uses lifetime exemption and requires a gift tax return (Form 709). So the policy design and the gifting plan are one decision:

• Longer pay periods for bigger policies. A 10-pay, 20-pay or lifetime-pay design keeps each year's premium inside the annual-exclusion budget. A single-pay or 5-pay design concentrates the gift and burns lifetime exemption, which is fine if you have exemption to spare and want it done. The trade-off: a longer pay period means more total premium and more years of trustee administration.
• "7-pay" is a tax test, not a pay period. The 7-pay test decides whether a policy is a modified endowment contract (MEC) (IRC §7702A). A 7-pay premium schedule is not automatically MEC-safe or MEC-failing; the limit depends on the face amount and age. Short-pay designs usually fail the test unless the face is raised.
• MEC status rarely matters in a death-benefit ILIT. The income tax exclusion for the death benefit under IRC §101(a) has no MEC exception. MEC rules only change how lifetime loans and withdrawals are taxed. If the trustee may want to use cash value later, for example to buy assets from the estate, keep the policy non-MEC.

Which policy goes in the trust

For most ILITs the goal is a guaranteed death benefit at the lowest guaranteed premium, which points to guaranteed universal life. Married couples usually look at survivorship (second-to-die) coverage, because the estate tax typically falls at the second death. An IUL can work if it is funded to a guarantee and reviewed every year; trustees generally have a duty to monitor the policies they hold, and a non-guaranteed policy puts more of that burden on them.

Grandchildren: GST tax and allocating your exemption

Transfers that skip a generation can owe generation-skipping transfer (GST) tax at 40% on top of estate tax, beyond the $15 million GST exemption. Annual-exclusion gifts to a pooled trust for several grandchildren do not automatically get a zero inclusion ratio (IRC §2642(c)), so GST exemption has to be allocated to the premium gifts. Automatic allocation rules exist with exceptions (IRC §2632(c)); best practice is to allocate affirmatively each year on Form 709. The leverage is the reason dynasty ILITs exist: exemption allocated to small premiums shelters a much larger death benefit for later generations.

Moving an existing policy: the 3-year rule

If you give an existing policy to an ILIT and die within 3 years, the proceeds are pulled back into your estate (IRC §2035). Having the trustee apply for and own a new policy from day one avoids this. Selling a policy can also trigger the transfer-for-value rule, which can make part of the death benefit taxable unless an exception applies; a sale to a grantor trust of the insured is a known workaround. Both are attorney decisions.

Costs of running an ILIT

Expect attorney drafting fees, a trustee (a family member or a professional), annual Crummey letters, Form 709 filings and a separate trust bank account. Hans is not an attorney: he designs and places the policy and works alongside your estate attorney and CPA.

Projected over the exemption? Get the ILIT policy design right first

Send your situation. Within one business day you get a written read: whether an ILIT is worth a conversation with your estate attorney, single-life or survivorship, guaranteed or indexed, and a pay period that fits your Crummey gifting budget.

Hans designs and places the policy. Your estate attorney drafts the trust; your CPA handles Form 709.

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Rather talk it through? Or book 15 minutes on Hans’s calendar, or call 213-414-2808.

Hans Goldstein · 213-414-2808 · NPN 20602398, independent licensed insurance producer

Frequently asked questions

Sources

1. 26 U.S.C. §2042 (life insurance proceeds in the estate), Cornell LII
2. 26 U.S.C. §2001 (estate tax rate), Cornell LII
3. 26 U.S.C. §2010 (unified credit, basic exclusion amount), Cornell LII
4. IRS Rev. Proc. 2025-32 (2026 inflation adjustments)
5. IRS Rev. Proc. 2022-32 (late portability election)
6. Congressional Research Service R48611 (P.L. 119-21 tax provisions)
7. IRS: Frequently asked questions on estate taxes
8. RCW 83.100.040 (Washington estate tax)
9. ORS 118.010 (Oregon estate tax)
10. Massachusetts DOR estate tax guide
11. 26 U.S.C. §2514 (powers of appointment, 5-and-5 rule), Cornell LII
12. 26 U.S.C. §7702A (modified endowment contracts), Cornell LII
13. 26 U.S.C. §101 (death benefits, accelerated benefits), Cornell LII
14. 26 U.S.C. §2642 (GST inclusion ratio), Cornell LII
15. 26 U.S.C. §2632 (GST exemption allocation), Cornell LII
16. 26 U.S.C. §2035 (transfers within 3 years of death), Cornell LII
17. In re Stuart Cochran Irrevocable Trust, 901 N.E.2d 1128 (Ind. Ct. App. 2009)
18. French v. Wachovia Bank, N.A., 722 F.3d 1079 (7th Cir. 2013)
19. Rafert v. Meyer, 290 Neb. 219 (2015)