Contributed by: Briak Sak, CFP, CLU, ChFC
When clients begin to think more intentionally about their legacy, few tools offer the flexibility, control, and tax advantages of an Irrevocable Life Insurance Trust, or ILIT. Often overlooked in general financial planning conversations, the ILIT is a sophisticated estate planning solution that can address multiple objectives: preserving wealth across generations, mitigating estate taxes, and ensuring liquidity during a time when it’s most needed.
At Granite Harbor Advisors, our clients—business owners, corporate executives, and multigenerational families—frequently face a similar challenge: how to protect and transfer significant wealth in a way that reflects their values, meets the needs of their heirs, and is resilient under complex tax rules. In this article, we explore what an ILIT is, how it works, and why it’s a key component in the broader context of integrated estate planning.
Defining the ILIT: More Than Just a Trust
An Irrevocable Life Insurance Trust is a legal entity designed to own a life insurance policy outside of the insured's taxable estate. As the name implies, it is irrevocable—meaning once it is created and funded, the terms cannot be changed and the grantor (the person creating the trust) cannot reclaim the assets.
This structure accomplishes several key goals:
- Estate Tax Mitigation: By removing the death benefit from the insured's estate, an ILIT can significantly reduce or eliminate estate tax exposure.
- Asset Protection: Because the trust owns the policy, the proceeds are protected from creditors and potential lawsuits.
- Control Over Distributions: The grantor can dictate the terms under which beneficiaries receive proceeds, which is particularly important when planning for young children, spendthrift heirs, or blended families.
- Liquidity for the Estate: Life insurance proceeds can provide immediate liquidity to pay estate taxes, debts, or expenses without requiring the sale of illiquid or sentimental assets such as real estate or a family business.
How the ILIT Works in Practice
An ILIT typically follows this structure:
- Creation and Funding: The trust is established with the assistance of an estate planning attorney and a financial advisor. The grantor may transfer an existing life insurance policy into the trust (with potential gift tax implications) or fund the trust with cash to purchase a new policy.
- Premium Payments: Each year, the grantor gifts funds to the ILIT to pay premiums. These gifts may qualify for the annual gift tax exclusion if the trust provides beneficiaries with a temporary right to withdraw the gift—commonly referred to as a "Crummey power."
- Policy Ownership: The trust is the policy owner and beneficiary. Upon the insured’s death, the insurance proceeds are paid directly into the trust.
- Trustee Administration: A trustee—typically not the grantor—manages the trust and is responsible for ensuring that premiums are paid and proceeds are distributed according to the trust’s terms.
- Distributions to Beneficiaries: The trustee can use the proceeds to purchase estate assets from the estate, loan money to the estate, or distribute funds directly to heirs. This flexibility allows the estate to meet its obligations without liquidating valuable or strategic holdings.
Addressing Common Misconceptions
One of the reasons ILITs are underutilized is that they are often misunderstood. Many believe that by giving up ownership of the policy, they are also giving up control. In reality, while the ILIT is irrevocable, careful drafting allows significant flexibility through the trustee’s discretion and the trust’s distribution provisions. Others may fear that the strategy is only for the ultra-wealthy, when in fact, individuals with estates approaching the federal exemption limit—or those living in states with their own estate tax thresholds—can benefit meaningfully.
It’s also important to note that the ILIT must be set up and funded before the insured’s death. Unlike other tools that can be implemented closer to life’s end, the ILIT is a forward-looking strategy. It requires a coordinated approach between an estate planning attorney, insurance specialist, and wealth advisor.
When an ILIT Makes Sense
ILITs are especially beneficial for:
- High-net-worth individuals with projected estate tax liabilities
- Business owners seeking to preserve control and continuity without forcing a sale to cover estate taxes
- Families with complex dynamics who want to ensure structured, purposeful distribution of assets
- Clients with charitable goals, as ILITs can be paired with charitable remainder or lead trusts for greater impact
While ILITs require more planning and administration than simple beneficiary designations, the long-term benefits are significant. They can create structure, reduce uncertainty, and ultimately help ensure that a family’s wealth is transferred in a manner consistent with their values and vision.
Integrating the ILIT into a Broader Financial Strategy
At Granite Harbor Advisors, our approach to estate planning is integrated and team-based. We don’t just design isolated strategies—we look at the full financial picture. That means understanding how an ILIT interacts with existing trusts, tax strategies, business succession plans, and investment portfolios.
An ILIT can be a powerful complement to:
- Grantor Retained Annuity Trusts (GRATs) or Spousal Lifetime Access Trusts (SLATs)
- Buy-sell agreements funded by life insurance
- Private placement life insurance where additional investment flexibility is required
- Charitable giving strategies, when paired with wealth replacement trusts
We also help ensure that the trust’s funding is executed efficiently. This includes working with our clients to evaluate premium financing options, structure Crummey notices properly, and integrate the ILIT into broader multigenerational planning.
The GHA Difference
What sets Granite Harbor Advisors apart in this process is not only our technical expertise but also our deep understanding of the emotional and relational aspects of wealth transfer. Estate planning is not just a legal or financial exercise—it’s a personal one. That’s why we take the time to understand your family’s unique goals and dynamics before recommending a path forward.
As a firm, we bring the collective wisdom of a team, not just an individual. We offer access to public and private market solutions, advanced insurance planning, and a continuity structure that ensures our clients’ plans are implemented and supported for decades to come.
Final Thoughts
An Irrevocable Life Insurance Trust is not a one-size-fits-all solution, but when aligned with a thoughtful and comprehensive wealth plan, it can serve as a cornerstone of legacy preservation. It offers clarity, control, and confidence—especially in moments when your family will need them most.
For clients with substantial estates and a desire to pass on more than just assets, the ILIT offers a well-established and elegant solution. It is a way to safeguard your vision and extend your impact, well beyond your lifetime.
If you’re considering whether an ILIT fits within your broader planning strategy, we welcome the opportunity to have that conversation.