Irrevocable Life Insurance Trust: The 2026 Guide

An irrevocable life insurance trust is one of the most effective tools for protecting wealth and creating long-term financial security. In simple terms, this type of estate planning trust owns a life insurance policy so that the policy’s proceeds do not count toward the value of your taxable estate. That separation can make a significant difference for families who want to keep more of what they have built while maintaining flexibility and dictating how those funds are used.

In 2025, Congress passed the One Big Beautiful Bill Act (OBBBA), setting the estate and gift tax exemption at $15 million per individual, indexed for inflation. The higher exemption simplified planning but did not make life insurance trusts obsolete.

An ILIT still plays a key role in wealth protection and legacy planning. It can help your loved ones get cash quickly and protect proceeds from creditors. It also lets you set clear terms for how the money is used, giving you a measure of influence that an ordinary life insurance policy cannot provide.

At Studemont Group, LP, we help families and business owners design ILIT strategies that align with their goals and values. Even with today’s high exemptions, understanding how an irrevocable life insurance trust fits into your estate plan is key to preserving your legacy.

What Is an Irrevocable Life Insurance Trust (ILIT)?

An irrevocable life insurance trust is a specific type of life insurance trust that holds a life insurance policy for your benefit and your family’s protection. The trust, not you, owns the policy. When you pass away, the insurance proceeds go to the trust instead of your estate, which can help reduce potential estate taxes and simplify how the funds are passed to your heirs. The Internal Revenue Service notes that when a person does not own or control their policy, the proceeds are generally excluded from their taxable estate.

What Is an ILIT in Practice?

Think of an ILIT as a box built to hold a single valuable item: your life insurance policy. Once the trust is created, you no longer technically control it, which is what makes it “irrevocable.” The fact that you can’t change the trust or take back ownership later is part of what makes it so effective for estate planning. The trust owns the policy and uses your contributions to keep it active, passing the proceeds later to the people you’ve chosen. According to the University of Minnesota Extension, placing a life insurance policy inside an irrevocable life insurance trust can keep the death benefit out of your taxable estate and ensure your family has immediate funds available when they need them most.

An ILIT involves three parties: the grantor who creates it (you), the trustee who manages it, and the beneficiaries who receive the proceeds.

How an ILIT Differs From a Revocable Trust

A revocable living trust lets you change your mind. You can amend or dissolve it while you’re alive. The trade-off is that since you still govern the assets, they’re counted in your taxable estate when you pass away. An ILIT gives up that flexibility but gains the advantage of protection and potential tax savings. That distinction is important in the sense that what you decide today helps protect your family tomorrow.

How an ILIT Works

Think of an ILIT as a separate financial home built to hold your life insurance policy safely outside your estate. In life insurance estate planning, that separation matters because it helps keep the death benefit protected from estate taxes and creditors while avoiding delays in probate.

When you create this type of estate planning trust, you transfer ownership of the insurance policy into the trust. From that point the trust owns the policy, not you. The trustee manages the policy and pays premiums with the funds you contribute while following Internal Revenue Service rules so the structure stays compliant. The result is a legally distinct entity that controls and eventually receives the life insurance proceeds.

The Process of an ILIT in Action

Once the ILIT is in place, the trust becomes the owner of the policy. You make contributions so the trustee can pay premiums and send Crummey notices to beneficiaries. When you pass away, the insurer pays the death benefit to the trust, and the trustee follows your instructions for distributing the funds. For example, a business owner can use an ILIT to hold insurance proceeds that provide family cash flow without forcing the sale of a business.

Why Structure Matters

This setup allows you to dictate how funds are used while removing ownership that could trigger estate inclusion. The trust owns the policy and you give up certain rights, so you create a clear separation between your estate and the insurance benefit. That separation makes an ILIT one of the most effective tools in life insurance estate planning.

To stay compliant, it is important not to keep any rights that the IRS considers incidents of ownership, such as changing beneficiaries or borrowing against the policy. These rights can cause the proceeds to be counted in your estate, according to Cornell Law School’s Legal Information Institute.

Now that you know how an ILIT functions, the next step is to look at why it can be so valuable. The benefits go far beyond tax reduction and can shape how your family experiences financial security for generations.

Key Benefits of an ILIT in 2026

Understanding the irrevocable life insurance trust benefits available today shows why this planning tool still matters in 2026. An ILIT helps protect assets and guide how life insurance proceeds are used across generations.

Estate Exclusion

A core life insurance trust advantage is that the death benefit can stay outside your taxable estate. If you own a policy in your name, the payout is usually counted when calculating your estate’s value. By having the estate planning trust own the policy, the proceeds are excluded if the ILIT follows IRS guidelines. For anyone close to the $15 million exemption under OBBBA, this feature helps maintain flexibility and keep more value in the family.

Creditor Protection

An ILIT also provides strong asset protection. Because the trust owns the life insurance policy rather than you, it’s often beyond the reach of creditors or lawsuits. For example, a business owner facing a legal dispute years later would not risk losing the policy proceeds, since the assets are held within the trust for beneficiaries.

Estate Liquidity

The ILIT also provides quick access to cash for taxes or expenses when the rest of the estate is tied up in illiquid assets. The life insurance payout to the trust gives heirs the estate liquidity needed to cover expenses without selling valuable holdings.

Legacy Planning

You can also decide how and when beneficiaries receive funds, giving structure to how your legacy supports their future. The result is a structured way to pass down resources while maintaining your values and intentions.

The irrevocable life insurance trust benefits extend well beyond taxes. By combining protection from creditors with improved estate liquidity and clear legacy planning, an ILIT remains a lasting foundation for life insurance estate planning in 2026.

For personalized guidance, visit Studemont Group’s estate and legacy planning services.

ILITs in the 2026 Estate Planning Landscape

As you look at your family’s future and how to protect your assets, it helps to understand the broader context of an estate planning trust in 2026. Thanks to the passage of the OBBBA, the federal estate tax exemption now sits at $15 million per individual or $30 million for married couples, effective January 1, 2026.

With the new law in place, the higher federal exemption reduces some tax pressure, but an ILIT still plays an important role by keeping assets protected and ensuring funds are available to meet estate needs while supporting long-term family goals.

Why an ILIT Still Matters for 2026 and Beyond

ILITs remain useful because laws can change, both at the federal and state levels, and family assets often lack liquidity. The trust provides structure, as well as cash when needed and guidance over how wealth passes to the next generation.

In short, the shift to a $15 million per individual exemption under new law reduces the immediate pressure for tax-avoidance strategies, but it does not remove the need for thoughtful structuring through an estate planning trust such as an ILIT. In the next section, we will show how to set up an irrevocable life insurance trust step by step so you can see how it fits into your long-term plan.

How to Set Up an Irrevocable Life Insurance Trust

If you’ve ever wondered how to set up an irrevocable life insurance trust, you’re not alone. Setting up this kind of trust can feel technical, but when handled correctly, it’s a straightforward process that delivers long-term value. An ILIT is an irrevocable trust setup designed to hold a life insurance policy within a separate estate planning trust. Here’s how the ILIT setup process typically works from start to finish.

Step 1: Work with an Estate Planning Attorney

Most people begin by meeting with a seasoned estate planning attorney who can draft the trust around their goals. Small details matter here: language errors or missing clauses can lead to unexpected tax results. The IRS notes that gifts to the trust are usually covered under the annual gift tax exclusion, which sits at $19,000 per recipient for 2025, with updates each year. If you want an insurance expert that will coordinate your strategy with your attorney or legal team, visit Studemont Group’s contact page to get started.

Step 2: Choose a Trustee

Next, you’ll choose someone trustworthy to act as the trustee. This person (or institution) manages the trust’s bank account, receives your annual gifts, sends required notices, and pays the premiums. A good trustee keeps clean records and ensures the trust follows IRS guidelines, something that helps the trust function exactly as intended.

Step 3: Create and Sign the ILIT

After that, your attorney finalizes the trust document and you sign it. The trust becomes the legal owner of the policy. This distinction matters because, if you personally hold any “incidents of ownership” (like the power to change beneficiaries), the proceeds could be pulled into your estate for tax purposes under 26 U.S. Code § 2042.

Step 4: Fund the Policy Correctly

Once the ILIT is in place, most people make yearly gifts to the trust so the trustee can pay the premiums. To meet IRS rules, the trustee sends Crummey notices to the beneficiaries, giving them a limited time to withdraw the gift. That small window turns the contribution into a “present interest” gift that qualifies for the annual exclusion.

Step 5: Buy or Transfer a Policy

The trust may buy a new policy or you might transfer an existing one. If you transfer, be aware of the three-year rule under 26 U.S. Code § 2035, which can include the policy in your taxable estate if death occurs within three years of the transfer. Your attorney will help you determine which route makes the most sense.

Step 6: Maintain the Trust Each Year

Each year, the trustee repeats the same rhythm: accepting gifts, sending Crummey notices, paying premiums, and documenting every step. This steady routine keeps the ILIT in compliance and the estate planning trust sound.

ILITs and Life Insurance in Estate Tax & Wealth Preservation Planning

When it comes to life insurance and estate taxes, using an estate planning trust like a properly designed ILIT can make a big difference. With a well-structured setup, you can move life insurance outside your taxable estate and create both liquidity for your heirs and a fair distribution of your wealth.

Maximizing After-Tax Wealth Transfer

A key goal in life insurance estate planning is to ensure the death benefit avoids being included in your taxable estate. If you personally own a life insurance policy and retain certain powers over it, the proceeds may be included in your gross estate under Internal Revenue Code § 2042. But when you place the policy inside an ILIT, the trust owns and is beneficiary of the policy. That separation helps the proceeds escape estate taxation when correctly administered.

For example, a $5 million life policy taxed at 40% could create a $2 million estate tax bill. Holding the policy in an ILIT keeps those funds intact for your heirs.

Liquidity Planning, Equalization, Succession Funding

• Liquidity planning: Many estates hold homes, businesses or real estate that cannot easily be sold quickly. By placing a life insurance policy in an ILIT, you create a source of cash separate from your estate. That cash can pay taxes, debts or other costs without forcing a sale of key assets.

• Equalization of inheritances: If one child takes over a business and another does not, you can use life insurance proceeds held in trust to give the non-business child fair value. The ILIT distributes per your terms and keeps the process clear and separate.

• Succession funding: Business owners can design an ILIT to fund a buy-sell agreement or provide capital for the next generation when they take over. The trust’s death benefit becomes ready cash at the right time.

Why Life Insurance Trust for Tax Planning Still Matters

Even though estate tax thresholds may feel generous, the value in using a life insurance trust for tax planning remains strong. First, the federal estate tax is only one piece of the picture.

Many states have their own estate or inheritance taxes with lower thresholds. Second, while the tax savings are important, the greater value often comes from control, structure, and the protection of your legacy. Third, even if the death benefit were excluded from your estate, poor planning could inadvertently bring it back in.

Key Technical Notes to Watch

• Ensure you relinquish “incidents of ownership” in the policy so it is not included in your estate.

• Be aware of the “three-year rule” under IRC § 2035: if you transfer a policy shortly before death, it may still be included in your estate.

• Use proper annual gift mechanisms (such as Crummey letters) so that the premiums paid by the trust do not trigger gift tax issues.

• Coordinate your ILIT setup with your overall estate plan, business succession strategy and policy design. This is where working with the team at Studemont Group adds real value. We help you align your policy, trust, and distribution goals so your approach is smooth and integrated.

Risks and Considerations

While an ILIT offers many advantages, it also comes with responsibilities and limits you should understand before setting one up. Knowing the key irrevocable life insurance trust considerations helps you plan ahead and avoid surprises.

• Irrevocability and Limited Flexibility: An ILIT is permanent once created and funded. That permanence keeps the life insurance proceeds outside your estate but also limits flexibility. If your circumstances change, you may not be able to modify the trust or its beneficiaries.

• Trustee Responsibilities and Trust Administration: An ILIT requires careful management. The trustee must maintain separate accounts, send notices, pay premiums on time, and keep detailed records. Missing any of these steps can create compliance problems with the IRS.

• Costs and Compliance: Maintaining an ILIT involves some ongoing expenses for legal, accounting, trustee services, and policy upkeep. These costs are modest compared to the protection the trust provides but should still be included in your planning budget.

• The Need for Professional Guidance: Because ILITs combine insurance and tax law, it’s important to work with an experienced attorney and financial advisor to avoid errors that could jeopardize the trust’s effectiveness. The American Bar Association stresses that professional coordination is critical for trusts that involve both insurance and tax treatment.

With proper oversight and professional guidance, ILIT risks stay manageable and the trust can remain effective for decades.

When an ILIT Still Makes Sense (Even with the $15M Exemption)

It’s easy to assume that with the OBBBA’s $15 million estate tax exemption, most families no longer need a trust. But knowing when to use an irrevocable life insurance trust can help you see that an ILIT still has an important role even in today’s environment. The law may have changed, but the need for structure and long-term financial stability has not.

• For High-Net-Worth Families: Even if your estate is below the federal exemption, growth in investments or property can raise its value over time. An ILIT helps keep life insurance proceeds outside your taxable estate, preserving more wealth for future generations.

• For Business Owners: An ILIT can support a succession plan by providing cash for taxes or debt and preventing a forced sale of business assets. It also acts as an asset protection trust, keeping insurance proceeds separate from business liabilities.

• For Residents of High-Tax States: Some states tax estates well below the federal limit. In places like Massachusetts and Oregon (rates up to 16% on estates over $2 million and $1 million, respectively; taxfoundation.org), an ILIT can help reduce state estate taxes and preserve more wealth for your family.

• For Control, Privacy & Protection: Beyond taxes, an ILIT lets you guide how funds are used while keeping the payout private and outside probate, offering oversight and confidentiality that direct ownership cannot.

An ILIT remains one of the most flexible and forward-looking estate tools available. If your goal is to preserve what you’ve built and pass it on efficiently, understanding when to use an irrevocable life insurance trust helps reveal why it remains valuable well beyond tax considerations.

Working with Studemont Group

Choosing the right partner can make all the difference when you are ready to build an estate plan that truly lasts. Studemont Group estate planning is built on one guiding belief: every family deserves a coordinated plan designed to protect what matters most.

Our team serves as your life insurance trust advisor, helping you build and maintain an ILIT that fits your long-term goals. We focus on how the trust connects with your life insurance policy and integrates with your broader financial plan. This approach ensures your ILIT stays effective as your circumstances change over time.

A Collaborative Approach

Studemont Group works with experienced estate attorneys and CPAs to make sure your ILIT aligns with your broader financial plan and stays compliant with current tax laws.

Protecting Your Financial Legacy

Our team offers ILIT consulting to simplify trust management and policy performance, turning complex rules into clear steps that protect your family’s future with confidence.

If you are ready to explore how an ILIT can fit into your estate strategy, we can guide you every step of the way. Schedule your ILIT strategy consultation today.

Conclusion: Secure Your Legacy Beyond Taxes

An irrevocable life insurance trust is still one of the most effective ways to protect your family’s financial future, even in a high-exemption era. It offers structure, privacy, and long-term stability, which are all essential parts of life insurance estate planning. By placing a policy inside an estate planning trust, you create a reliable source of funding that keeps your loved ones secure while honoring your intentions.

At its core, an ILIT gives you confidence that your assets will be used the way you planned. It protects your wealth while keeping your estate organized and your family financially secure. For many families and business owners, it is the foundation that ties an entire plan together. If you are ready to strengthen your estate plan and secure your legacy, the team at Studemont Group, LP, can help you take the next step. Our advisors can guide you through each stage of creating and managing an ILIT that supports your goals for the future.

Start your ILIT strategy with Studemont Group today and take the first step toward lasting financial protection.

Please note that Studemont Group, LP is not a legal firm and does not offer legal advice. We advise you consult with your attorney, and we are happy to coordinate with your counsel in creating and executing your ILIT strategy.