Irrevocable Life Insurance Trust (ILIT)
Owns your life insurance policy so the death benefit is not in your taxable estate. Classic technique for high-net-worth estates where the policy face value would push you over the exemption.
An is an irrevocable trust that owns your life insurance policy. Because you don't own the policy, the death benefit is excluded from your federal gross estate at death. For someone near or above the federal exemption, a large term or permanent policy outside an ILIT can push an otherwise-exempt estate into taxable territory.
How it works: you create the ILIT, it applies for a new policy (or you transfer an existing one, which triggers a three-year lookback under IRC § 2035), and you make annual gifts to the ILIT which the trustee uses to pay premiums. Crummey notices to beneficiaries preserve the annual gift-tax exclusion on those transfers.
Failure modes: (1) transferring an existing policy and dying within three years — the death benefit still comes back into your estate, (2) skipping Crummey notices — the IRS may disallow the annual-exclusion treatment and the premium gifts become taxable, (3) you as grantor serve as trustee — fatal, blows the estate-tax exclusion.
Tagged 🔴 because the drafting and ongoing Crummey compliance are technical, the tax consequences of getting it wrong are large, and the trust is irrevocable — mistakes cannot be undone.
State-specific notes
Federal estate tax applies only to estates above the exemption ($13.99M / $27.98M for 2026). If your estate including life-insurance face value is well below the exemption, an ILIT provides no federal-estate-tax benefit; it may still provide creditor protection and structured payout advantages.
Virginia has no state estate tax, so the primary benefit of an ILIT for a Virginia resident is federal-only. Still relevant if net worth including insurance face value is approaching the federal exemption.
Alabama recognizes ILITs under its Uniform Trust Code (Ala. Code § 19-3B-101 et seq.), and proceeds held by a properly structured ILIT are excluded from the insured's probate estate. Because Alabama has no state estate tax, the primary benefit is federal estate-tax exclusion under IRC § 2042 (combined with the three-year lookback of § 2035). Spendthrift protection for beneficiaries is available under Ala. Code § 19-3B-502.
References
Prepare your attorney-intake packet
This strategy requires licensed counsel to draft. Use the builder to capture your facts, intent, and questions in an attorney-ready packet — you'll hand it to the lawyer who actually drafts the trust or agreement. This is not a legal instrument and does not create an attorney-client relationship.