An Irrevocable Life Insurance Trust (ILIT) is an irrevocable trust designed to own life insurance outside of the insured’s taxable estate.
When structured properly, the trust receives the insurance proceeds at death and manages or distributes those assets according to the terms of the trust. ILITs are commonly used to provide estate liquidity, support long-term family wealth planning, and help preserve assets that might otherwise need to be sold to cover estate taxes or other expenses.
Because the trust owns the policy rather than the insured individual, the insurance proceeds avoid inclusion in the taxable estate.
South Dakota DAPT ILIT Planning
A South Dakota ILIT can combine life insurance planning, dynasty trust planning, and long-term asset protection in a single structure. The trust may be designed to own life insurance outside the insured’s taxable estate, while also preserving the death benefit in a South Dakota dynasty trust after the insured’s death. This allows the planning to address multiple objectives at once: estate-tax-efficient life insurance ownership, liquidity for estate taxes or family needs, creditor and divorce protection for beneficiaries, professional South Dakota trust administration, and multigenerational wealth transfer.
Types of Irrevocable Life Insurance Trusts
New Policy ILIT
A new policy ILIT is established specifically to purchase and own a new life insurance policy.
Existing Policy ILIT
An existing policy ILIT involves transferring ownership of an existing life insurance policy into the trust.
ILIT Case Study
Robert and Elaine had spent decades building a family business and acquiring commercial real estate. By the time their net worth approached $20 million, much of their wealth was tied up in assets their children would not want to sell quickly, especially during the emotional and financial pressure that can follow the death of a parent.
As part of their estate plan, Robert and Elaine established an ILIT that purchased a $5 million survivorship life insurance policy. They used annual exclusion gifts to help fund the premiums without consuming lifetime gift tax exemption. The goal was to create liquidity outside of the taxable estate, so their children would have access to cash without being forced to sell business interests or real estate at the wrong time.
When the second spouse eventually passed away, the ILIT received the $5 million insurance proceeds outside of the taxable estate. At a 40% federal estate tax rate, excluding those proceeds from the estate saved the family approximately $2 million in estate taxes while also providing immediate liquidity for the next generation.
Summary
Robert and Elaine’s ILIT created $5 million of estate-tax-efficient liquidity for their family while helping save approximately $2 million in federal estate taxes. The structure helped preserve family business and real estate assets while giving their children greater financial flexibility after both parents were gone.
The right solution often involves more than one type of trust working together.
At Alta, we bring the fiduciary expertise, operational clarity, and a client-first approach to design a solution that truly fits you or your clients’ needs. Let’s make it simple.
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ILIT FAQs
Is a ILIT revocable?
No. An ILIT is an irrevocable trust, so it is not designed to be freely amended or revoked by the grantor after it is established. However, irrevocable does not have to mean inflexible. When an ILIT is established under South Dakota law, the trust agreement can be drafted with built-in flexibility to address future changes in law, family circumstances, tax planning, trustee administration, and beneficiary needs. South Dakota also has one of the strongest decanting frameworks in the country, which can provide an additional path to modify or modernize trust provisions when appropriate.
Why do people use ILITs?
ILITs are often used when a family wants to create liquidity outside of the taxable estate. In many cases, the goal is to help beneficiaries pay estate taxes, preserve illiquid assets such as a closely held business or real estate, or provide long-term financial support without forcing major assets to be sold quickly.
Who owns the life insurance policy in an ILIT?
The trust owns the life insurance policy. This ownership structure allows the policy proceeds to remain outside of the insured’s taxable estate.
Why does ownership matter?
Ownership matters because the proceeds of life insurance owned personally by the insured is included in the taxable estate. When the policy is owned by a properly structured ILIT, the proceeds avoid estate inclusion and be managed under the terms of the trust.
What are insurance proceeds commonly used for?
Insurance proceeds are often used to pay estate taxes, provide liquidity for heirs, preserve family businesses or real estate, equalize inheritances, or support beneficiaries over time.
Can existing life insurance policies be transferred into an ILIT?
Yes, existing policies may be transferred into an ILIT, but the transfer can involve technical tax rules and timing considerations. These details are typically evaluated carefully before moving an existing policy.
