Most life insurance policies are owned directly by the insured person or their spouse. But in certain situations, having a trust own the policy instead — commonly through an irrevocable life insurance trust (ILIT) — can serve specific planning goals.

Keeping the death benefit outside your taxable estate

If you personally own a life insurance policy, its death benefit is generally included in your taxable estate for federal estate tax purposes, even though the payout itself is typically income-tax-free to beneficiaries. For estates near or above the federal estate tax exemption, this can matter. An ILIT, properly set up and not controlled by the insured, can keep the death benefit outside the taxable estate.

Controlling how and when beneficiaries receive funds

Rather than paying a lump sum directly to heirs, a trust can specify staged distributions, conditions, or ongoing management — useful for beneficiaries who are minors, financially inexperienced, or receiving government benefits that a lump sum could jeopardize.

Providing liquidity for estate costs or a business

A trust-owned policy can provide cash exactly when it’s needed — for example, to help cover estate settlement costs, or to fund a business succession agreement, without forcing the sale of other assets like real estate or a family business.

Important details

For an ILIT to work as intended, it’s generally irrevocable and the insured typically cannot retain control over the policy. There are also specific rules (such as the three-year lookback for policies transferred into a trust) that can affect whether the strategy accomplishes its estate tax goal. Because the details are technical and mistakes can undo the intended benefit, this is a strategy that needs to be set up correctly from the start.

This article is educational and general in nature. It isn’t legal or tax advice. An irrevocable life insurance trust is a legal structure that should be set up by a licensed estate planning attorney, in coordination with a tax professional.