Understanding Irrevocable Life Insurance Trusts

What do the St. Louis Rams and Prince have in common? Their stories illustrate the pros and cons of ILIT insurance - or, more accurately, what happens when estate planning tools like an ILIT aren’t used at all. https://www.youtube.com/live/ni7KgQ_ZTLI They both became cautionary tales of what happens when estate planning falls short. When Georgia Frontiere passed away, her heirs were forced to sell the Rams to cover estate taxes. Prince’s estate? Still tied up in probate years after his death. These aren’t stories of neglect or ignorance. These are stories of high-capacity individuals who didn’t have the right tools in place. And that’s why today’s conversation matters. Because we’re diving into a financial strategy that could mean the difference between your family being forced to sell a cherished asset—or preserving it for generations. But what is an ILIT, exactly? In this episode, we discuss all things relating to ILITs, or Irrevocable Life Insurance Trusts, why they matter, and why they are something you should probably pay attention to. Why ILITs Matter More Than You Might ThinkWhat Is an ILIT and How Does It Work?Estate Taxes: Why the Exemption Threshold MattersThe Pros and Cons of an ILITPros:Cons:When Does an ILIT Make Sense?Strategic Flexibility: You Don’t Have to Choose All or NothingThe Generational Impact of Strategic PlanningIs an ILIT Right for You—or Is There a Better Option?Book A Strategy CallFAQsWhat does ILIT mean?Why would someone choose an ILIT instead of owning the policy personally?Can you change an ILIT after it has been created? Why ILITs Matter More Than You Might Think Whether you’re familiar with ILITs or hearing the term for the first time, this strategy could hold the key to protecting your estate, reducing tax liability, and setting up your heirs for success. But it’s not a one-size-fits-all solution. In fact, it may not be the right move for everyone—but for some, it can be one of the most powerful wealth-preserving tools available. This blog will unpack what an ILIT is, how it works, and most importantly, the pros and cons of an ILIT. We’ll also explore the real-life application of ILITs, share client insights, and equip you with actionable steps you can take. And if you’ve ever wondered what an ILIT is in simple terms, this section will lay the groundwork before we explore the details later in the article. By the end, you’ll know if this tool aligns with your multigenerational vision and the legacy you want to leave. And if it does, you’ll be empowered to act decisively. What Is an ILIT and How Does It Work? An ILIT—short for Irrevocable Life Insurance Trust—is exactly what it sounds like: a trust that holds life insurance outside of your estate. It has its own tax ID, its own trustee (not you), and its own beneficiaries. This separation means that when you pass, the death benefit doesn’t get added to your estate total, which could potentially save your heirs from paying up to 40% in federal estate tax on that benefit. At the state level, those percentages could be even more aggressive depending on where you live. That’s the power of an ILIT: separation equals protection. It turns your life insurance policy into a strategic asset that bypasses probate and keeps your wealth intact. This structure is often referred to as ILIT insurance because the trust becomes the policy owner and manages the death benefit outside your taxable estate. Estate Taxes: Why the Exemption Threshold Matters Right now, the estate tax exemption for a couple is over $26 million. That means if your estate is worth less than that, you won’t owe federal estate taxes. But here’s the catch: that number is a moving target. It’s not static, and it’s not guaranteed. Congress has changed it before and will likely do so again. Under previous administrations, the exemption was as low as $2 million. And with $36 trillion in national debt and rising, the likelihood of Congress lowering that threshold is very real. It’s not a matter of if the rules will change—it’s a matter of when. And if you wait until after they do, it may be too late to put the right tools in place. That means even if your estate is valued at $10 or $15 million today, you could face estate taxes tomorrow—unless you plan proactively. This is also where understanding an ILIT's meaning becomes useful, since removing a policy from your taxable estate can soften the impact of those shifts. The Pros and Cons of an ILIT Pros: Reduces Estate Taxes: The biggest benefit. By keeping the death benefit outside your estate, you prevent your estate from ballooning in value and triggering taxes. Leverage Your Dollars: Use life insurance to pay estate taxes at a discount. You might pay $500,000 in premiums to get a permanent guaranteed $1.5 million tax-free death benefit. Preserve Illiquid Assets: Avoid forced liquidation of businesses, real estate, or stocks. Your heirs don’t have to sell under pressure to cover taxes. Predictability and Peace of Mind: You know your heirs will have the funds they need without having to scramble or liquidate assets during a time of grief. Cons: Loss of Control: Once the policy is in the ILIT, it’s no longer yours. The trustee controls the assets, and they can say “no” to requests to access the cash value. Irrevocability: You can’t make changes without going through complex legal channels. And while there are exceptions, treat it like it’s permanent. Trustee Risk: Even if your trustee is your child, money changes people. And, as Bruce said, “In-laws become outlaws.” Administrative Complexity: ILITs require ongoing attention, especially when it comes to funding and compliance with gift tax rules. Upfront Legal Costs: ILITs need to be drafted by an attorney who understands estate law. It’s not something to DIY. When Does an ILIT Make Sense? If your estate is well beyond the exemption limit, an ILIT can save you millions in taxes. But even if you’re just approaching that threshold, it’s worth considering. We don’t know where the limit will be when your estate passes. Planning ahead is protection. This is especially true for: Entrepreneurs and business owners Families with significant real estate holdings Anyone with $10M+ in projected net worth Investors building wealth in illiquid assets Families wanting to keep assets (like land or a business) in the family line This is not the only factor to consider, which is why talking to a good estate planning attorney is critical. And in many cases, there are other strategies that capture most of the benefits people want from an ILIT, with fewer tradeoffs. If you’ve been wondering what an irrevocable life insurance trust is and whether it applies to situations like these, this is where the structure usually begins to make practical sense. Strategic Flexibility: You Don’t Have to Choose All or Nothing You can have multiple policies. Some are inside an ILIT for protection. Others are outside for flexibility. You can even set up an ILIT without funding it right away. That way, you’re prepared to act when needed. This hybrid approach lets you keep access to your cash value today while still having a plan for transferring wealth tax-efficiently. Many of our clients use this approach: build the ILIT structure now, keep it ready, and move assets into it when it makes strategic sense. The Generational Impact of Strategic Planning Rachel brought this back to the heart of our mission: Legacy isn’t just about dollars. It’s about stewardship. An ILIT can become a financial rigging—a structure that supports your values and equips your heirs. Used wisely, it empowers your children to use wealth for production, not consumption. To multiply the blessing. To build a legacy. Imagine your life insurance proceeds not just covering taxes—but funding future premiums, education, charitable giving, business start-ups, or family banking systems. That’s the power of thinking seven generations ahead. ILITs aren’t about loopholes. They’re about legacy design. And for families exploring what an ILIT is in a broader, long-term sense, this impact on stewardship is often the real reason they choose to set one up. Is an ILIT Right for You—or Is There a Better Option? If you value keeping your wealth intact for future generations, minimizing estate tax exposure, avoiding forced sales of businesses or property, and reducing the risk of probate drama, an ILIT can be a powerful tool. But it comes with a major trade-off: control. Once the trust is set up and funded, you can’t easily change your mind, and you’ll rely heavily on the trustee and the trust language you put in place from day one. That’s why it’s so important to step back and ask, “Is an ILIT the best tool for my situation—or just the most common one people talk about?” For many high-net-worth couples, there are strategies that can capture most of the benefits people want from an ILIT, with more flexibility and access during life. In this follow-up article, we compare ILITs with a structure that often works better for married couples—a Spousal Lifetime Access Trust (SLAT)—and walk through when each one makes sense in a real legacy plan: SLAT vs ILIT: Which Is Better for High-Net-Worth Estate Planning? Book A Strategy Call And if you're ready to make a move, our advisor team is ready to help you walk this out—without pressure, without overwhelm, and with full clarity. Because your legacy matters. And while the future might feel uncertain, the ability to take action today? That’s fully in your hands. If you’re still weighing up what an irrevocable life insurance trust is and how it fits into your overall plan, our team can help you look at the options in a way that’s clear and practical. Start the conversation today.