Using an Irrevocable Life Insurance Trust (ILIT) to Help Your Heirs Pay Estate Taxes

By David Frederickson · Licensed Life Insurance & Annuity Agent · Licensed in 30 states and Washington, D.C. · FL License #W827787 · Last reviewed October 28, 2026

I like to say I sell dreams. Here is what I mean. A family spends forty years building something: a family business, a few rental properties, a home the grandkids already call "the beach house." The dream is that it stays in the family. What protects that dream isn't a pep talk. It's a guarantee: a promise from a life insurance company, written into a contract and backed by that company's claims-paying ability, to pay a set amount when it is needed most.

Estate taxes are one of the moments when it is needed most. This guide explains how an irrevocable life insurance trust (ILIT) is designed to work. It covers why some very wealthy families have still been forced to sell what they loved, and how I work alongside your estate attorney and CPA so the pieces fit together. Life insurance for estate planning can be an important part of the picture.

One thing up front, because it matters: I'm a licensed life insurance agent. I'm not an attorney, a CPA, or a certified financial planner. Nothing here is legal or tax advice; consult your own attorney and tax advisor before acting. Your attorney drafts the trust and decides how it is structured. Your CPA handles the tax side. My job is the policy that funds the plan.

What is an irrevocable life insurance trust (ILIT)?

An ILIT is a trust designed to own life insurance on you, or on you and your spouse. Because the trust owns the policy, not you, the death benefit may be kept out of your taxable estate if the trust is set up and run correctly. The trustee can then provide your heirs cash when it's needed.

"Irrevocable" is the key word. Once the trust is signed and funded, you generally can't take it back, change the beneficiaries on a whim, or borrow against the policy yourself. That loss of control is the point. Under federal tax law, life insurance proceeds are generally included in your estate if you held any "incidents of ownership" in the policy when you died (Internal Revenue Code §2042). An ILIT is designed so that the trustee holds those rights instead of you.

A typical ILIT has a few moving parts:

• The grantor: you, the person who creates the trust and usually gives it money for premiums.
• The trustee: someone other than you, often a trusted family member, advisor, or professional trust company, who manages the trust and the policy.
• The beneficiaries: usually your spouse, children, or grandchildren.
• The policy: owned by the trust, which is also named as its beneficiary.

Your attorney decides who fills each role and what the trust says. This is a place for a specialist, not a template.

Does your state have its own estate or inheritance tax?

It depends on where you live and where you own property. Most states don't have one. For 2026, the Tax Foundation counts 12 states and the District of Columbia with an estate tax and five states with an inheritance tax. Rules vary by state and change often, so ask your attorney about every state involved.

Several of those states set their exemptions far below the federal amount, so an estate that owes no federal tax may still owe a state one.

If you live in Florida

No. Florida doesn't currently collect a state estate tax. The Florida Department of Revenue states that a federal change eliminated Florida's estate tax for people who died after December 31, 2004. Since July 1, 2023, personal representatives no longer have to file the "no Florida estate tax due" affidavits. Federal estate tax still applies.

Florida's estate tax law was a "pickup" tax. It collected a share of what an estate would otherwise owe the IRS, through a federal credit. When Congress phased that credit out between 2001 and 2004, Florida's tax effectively went dormant. The law is still on the books, but no new estates owe it.

That's good news, but two cautions:

1. The federal estate tax still applies to estates above the federal exemption, wherever you live.
2. Property in other states can be a different story. If you own real estate in a state with its own estate or inheritance tax, tell your attorney.

How much is the federal estate tax exemption in 2026?

For people who die in 2026, the federal basic exclusion amount is $15,000,000 per person, according to the IRS (checked October 2026). The 2025 tax law (Public Law 119-21) set that figure and indexes it for inflation starting in 2027. A married couple may be able to shelter up to about $30 million, using portability of a spouse's unused exemption.

For years, families planned around the fear that the higher exemption from the 2017 tax law would "sunset" after 2025. That didn't happen. The 2025 law, which the IRS calls the Working Families Tax Cuts and which many people know as the One Big Beautiful Bill Act, raised the basic exclusion amount to $15 million for 2026. The Congressional Research Service reports that the taxable estate above the exemption is subject to a top federal rate of 40%.

So who still needs to think about estate taxes? More families than you might expect:

• Business owners. A closely held company may be worth far more on paper than it feels day to day.
• Real estate families. Property can be hard to sell quickly at a fair price.
• Couples near the line. Assets grow too, and tax laws can change again.

Your CPA and attorney can tell you whether your estate is likely to owe. If the answer is "maybe," the next question is where the cash would come from.

Why do wealthy families still run short of cash when estate taxes come due?

Because estate taxes are generally due in cash, and on a deadline, while family wealth often sits in businesses, real estate, or other assets that are hard to sell quickly at a fair price. An estate can be rich in assets and short on cash. When that happens, heirs may have to sell what the family meant to keep.

A well-known example comes from South Florida, where I'm based.

Joe Robbie was the founding owner of the Miami Dolphins, which joined the old American Football League in 1966. He died on January 7, 1990, and Elizabeth died in November 1991. In June 1993, UPI reported that the Robbie family was "under pressure to raise money to cover estate taxes totaling $47 million" from the death of Joe Robbie and the later death of his wife, Elizabeth. The family had said it would have to sell at least part of the team to settle the estate.

In January 1994, the Robbie family agreed to sell its interest in the Dolphins to H. Wayne Huizenga. UPI reported that the family "put the Dolphins up for sale to pay off taxes owed by the estate." In March 1994, NFL owners approved Huizenga's $138 million bid.

It's worth being precise about what this story does and doesn't show. A 1992 report mentioned a family insurance policy, but it was nowhere near enough to cover the tax bill. This wasn't a family that ignored planning. It was an estate that was asset-rich and cash-poor, with most of its value tied up in a football team and a stadium interest. When the tax bill arrived, there wasn't enough liquid money to pay it without selling the very thing the family had built.

Most families I sit with don't own an NFL team. The pattern can be the same on a smaller scale: a family business, a strip center, a few rental homes. The question isn't "Are we wealthy?" It's "If the bill came due in a few months, could the family pay it without selling the thing we're trying to pass on?"

How can an ILIT help heirs pay estate taxes without a fire sale?

An ILIT can give your family a pool of cash, the policy's death benefit, when estate taxes come due. Because the trust owns the policy, the proceeds may stay outside your taxable estate. The trustee can then buy assets from the estate or lend to it, so the estate can pay what it owes.

Here's the general flow of a typical arrangement:

1. Your attorney drafts the ILIT and a trustee is named.
2. The trust applies for and owns a life insurance policy on your life, or on both spouses with a "survivorship" or "second-to-die" policy, which pays after the second death. That is often when estate taxes come due for married couples.
3. You make gifts to the trust, and the trustee uses them to pay the premiums.
4. When the death benefit is paid, the trustee receives the proceeds.
5. The trustee provides liquidity to the estate, often by buying estate assets at fair value or by making a loan, as the trust document allows. The estate then uses that cash to pay its taxes and expenses.

Notice what's missing from that list: a rushed sale of the family business or the family property to a buyer who knows you're under pressure.

A few details your attorney will handle:

• How the trustee provides the cash. Many ILITs let the trustee buy assets from or lend to the estate without requiring it. The wording can affect whether proceeds end up back in the estate.
• Who the trustee is. You generally shouldn't be trustee of your own ILIT.
• How it fits your whole plan, alongside wills, revocable trusts, and business succession documents.

The ILIT doesn't make estate taxes disappear. What it can do is help make sure the money to pay them is already there, so your heirs inherit what you built rather than a sale they didn't choose.

What is the three-year rule for transferring an existing life insurance policy?

If you give an existing policy on your life to an ILIT and die within three years of the transfer, federal law generally pulls the death benefit back into your taxable estate (Internal Revenue Code §2035). That is why many attorneys prefer that a new ILIT apply for and own a new policy from the start.

It applies to life insurance because §2035 points back to §2042, the section that includes policies you own in your estate. In practice:

• If you already own a large policy, your attorney may still recommend moving it into an ILIT, with the three-year window in mind. Alternatives, such as a sale to the trust, have their own tax rules, so that's a question for your attorney and CPA.
• If you're buying new coverage for estate liquidity, it's common for the trust to be created first and to apply for the policy as the original owner. That way you never held incidents of ownership in the first place.
• Timing matters. The trust generally needs to be signed before the policy is applied for and issued. I'll make sure the application, ownership, and beneficiary designations match the structure your attorney sets up.

What are Crummey powers, and why does my attorney care about them?

Crummey powers give trust beneficiaries a short, temporary right to withdraw money you contribute to the trust. That withdrawal right is designed to let your premium gifts qualify for the federal annual gift tax exclusion, which is $19,000 per recipient for 2026. Whether to use Crummey powers, and how, is your attorney's decision.

Here's the problem they solve. When you give money to an ILIT to pay premiums, that's a gift. Normally, gifts to a trust are gifts of a "future interest," which don't qualify for the annual gift tax exclusion. A Crummey power gives each beneficiary a real, present right to withdraw the gift for a limited time. That may turn the gift into a "present interest" that can qualify.

The name comes from a 1968 federal appeals case, Crummey v. Commissioner, 397 F.2d 82 (9th Cir. 1968). The court looked at whether beneficiaries had a genuine legal right to demand the money, not whether they were likely to use it.

The usual routine:

1. You make a gift to the trust.
2. The trustee sends the beneficiaries written notice that they may withdraw their share within a set period.
3. If they don't withdraw it, the trustee uses the money to pay the premium.

The details matter, and the withdrawal rights must be real, not a wink-and-nod arrangement. Your attorney decides whether to include Crummey powers and how to draft them; your CPA advises on gift tax reporting. I help by keeping premium due dates and amounts clear, so the trustee has time to follow the process each year.

How does Connelly v. United States affect buy-sell life insurance?

In Connelly v. United States (2024), the U.S. Supreme Court held that life insurance owned by a company to fund a stock redemption counted toward the company's value for estate tax purposes. In that case, the result was $889,914 in additional estate tax. If your buy-sell agreement relies on company-owned life insurance, it's worth discussing with your attorney and CPA.

Here are the facts, as described by the Court:

• Brothers Michael and Thomas Connelly owned Crown C Supply, a building supply company in St. Louis.
• Their agreement said that if one brother died, the survivor could buy his shares. If the survivor declined, the company was required to redeem (buy back) them.
• To fund that obligation, the company bought $3.5 million in life insurance on each brother.
• Michael died in 2013. Thomas chose not to buy the shares, so the company redeemed them, using $3 million of the insurance proceeds.
• The estate valued Michael's shares at about $3 million. The IRS disagreed. It counted the insurance proceeds as a company asset, valued the company at $6.86 million, and valued Michael's shares at about $5.3 million. That added $889,914 in estate tax.
• The Supreme Court unanimously sided with the government.

The Court also noted that there were other options. It specifically mentioned a cross-purchase agreement, in which the owners buy policies on each other, while acknowledging that "every arrangement has its own drawbacks" and its own tax consequences.

What this means for business owners:

• If you have a buy-sell agreement, especially an older one, it may be worth having your attorney and CPA review how it's funded in light of Connelly.
• Ownership matters as much as the amount. The same death benefit can produce very different results depending on whether the company, the co-owners, or a trust owns it.

Which structure is right isn't my call; it depends on facts your attorney and CPA weigh. I can model coverage for whatever they recommend and make sure ownership and beneficiary designations match the documents.

Who sets up an ILIT: my estate attorney, my CPA, or my life insurance agent?

Your estate attorney drafts the ILIT and decides its legal structure. Your CPA advises on tax reporting, valuation, and gift tax returns. Your life insurance agent helps you choose, apply for, and maintain the policy that funds the plan. The plan works best when all three communicate with each other.

Here's how I think about the team:

What I bring is the policy side: how different permanent policies are designed to work, what is and isn't guaranteed in each contract, how underwriting works, and how to keep the policy aligned with the trust. You choose your professionals; I'm glad to work with whoever you trust.

What type of life insurance is usually used in an ILIT?

ILITs are often funded with permanent life insurance designed to last for life, such as guaranteed universal life or whole life. Married couples often use a survivorship policy, which pays after the second death. The right choice depends on your health, budget, goals, and how your attorney structures the plan.

A few points we'll talk through together:

• Term vs. permanent. Term insurance covers a set period. Estate liquidity may be needed decades from now, so many ILIT policies are permanent. We compare the main types including whole life and IUL permanent life insurance.
• Single life vs. survivorship. Because transfers to a U.S.-citizen spouse are generally exempt from federal estate tax through the marital deduction, many married couples' federal estate tax is deferred until the second death, so survivorship policies are common. Your attorney will confirm what fits.
• What's guaranteed and what isn't. Some policies offer guaranteed death benefits as long as premiums are paid as scheduled. Others have values that depend on the insurer's future dividends, credited interest, or charges, which are not guaranteed. I'll show you the guaranteed values side by side with any nonguaranteed values, so you know exactly what you're relying on. Every guarantee is backed solely by the financial strength and claims-paying ability of the insurance company that issues the policy.
• Underwriting. Coverage depends on your health and finances, and approval is never automatic.

Want to rough out the numbers before we meet? Our free Financial Inventory Calculator can help you organize what you own and what you might owe, as a starting point for the conversation with your advisors.

What are the downsides of an ILIT?

You give up control. The trust is generally permanent, you usually can't serve as your own trustee, and you can't borrow against the policy yourself. There are legal and trustee costs, yearly paperwork such as Crummey notices, and gift tax reporting to keep up with. Your attorney and CPA can weigh whether the benefits outweigh those trade-offs for your family.

None of this is a reason to panic or a reason to rush. It's a reason to go in with clear eyes. An ILIT is a tool for a specific job, and part of my role is helping you and your advisors decide whether that job is yours.

What should I ask before setting up an ILIT?

Bring a rough list of what you own and what it's worth, any existing life insurance policies, your current wills or trusts, any buy-sell agreements, and the names of your attorney and CPA. Then ask: if estate taxes came due, where would the cash come from, and what would the family have to sell?

Here are questions I'd encourage you to raise with your team:

1. With your attorney: Is an ILIT appropriate? Who should be trustee? Crummey powers? Transfer existing policies or buy new coverage?
2. With your CPA: Roughly what might the estate owe under current law? How would the business be valued?
3. With me: How much coverage might provide enough liquidity? What's guaranteed and what isn't? How do we time it with the trust?
4. As a family: What do we most want to keep, and what would it mean to the next generation to sell it?

That last question is the real one. Everything else is paperwork in service of it.

Frequently asked questions

Let's protect what you've built

You've spent a lifetime building something worth keeping. An ILIT, drafted by your attorney and funded with the right policy, is designed to help your heirs have the cash to pay estate taxes, so they don't have to sell the dream to settle the bill.

I'd be glad to sit down with you, and with your attorney and CPA if you'd like, to look at whether life insurance belongs in your estate plan and what it might look like.

Book a conversation with David Frederickson →

USA Wealth Builder · Deerfield Beach, FL 33441 · usawealthbuilder.com

Sources

1. IRS, "IRS releases tax inflation adjustments for tax year 2026, including amendments from the One, Big, Beautiful Bill" (basic exclusion amount $15,000,000; annual gift exclusion $19,000): https://www.irs.gov/newsroom/irs-releases-tax-inflation-adjustments-for-tax-year-2026-including-amendments-from-the-one-big-beautiful-bill
2. IRS, "What's new — Estate and gift tax" (P.L. 119-21 sets the 2026 basic exclusion amount at $15,000,000): https://www.irs.gov/businesses/small-businesses-self-employed/whats-new-estate-and-gift-tax
3. 26 U.S.C. §2010 (unified credit; basic exclusion amount; inflation indexing after 2026): https://uscode.house.gov/us/usc/119-124/t26/s2010/
4. Congressional Research Service, "The Estate and Gift Tax: An Overview" (R48183) (top rate; spousal transfers; portability): https://www.congress.gov/crs-product/R48183
5. Florida Department of Revenue, "Florida Estate Tax" (Florida section): https://www.floridarevenue.com/taxes/taxesfees/Pages/estate_tax.aspx
6. Florida House of Representatives, Final Bill Analysis, CS/HB 619 (2023), State Estate Tax (Florida section): https://www.flsenate.gov/Session/Bill/2023/619/Analyses/h0619z1.WMC.PDF
7. 26 U.S.C. §2035 (transfers within 3 years of death): https://www.law.cornell.edu/uscode/text/26/2035
8. 26 U.S.C. §2042 (proceeds of life insurance; incidents of ownership): https://www.law.cornell.edu/uscode/text/26/2042
9. Crummey v. Commissioner, 397 F.2d 82 (9th Cir. 1968): https://law.justia.com/cases/federal/appellate-courts/F2/397/82/360188/
10. Connelly v. United States, No. 23-146 (U.S. June 6, 2024): https://www.law.cornell.edu/supremecourt/text/23-146
11. UPI, "Robbies agree to sell Miami Dolphins" (June 15, 1993): https://www.upi.com/Archives/1993/06/15/Robbies-agree-to-sell-Miami-Dolphins/9632740116800/
12. UPI, "Blockbuster's Huizenga buys NFL's Miami Dolphins" (Jan. 24, 1994): https://www.upi.com/Archives/1994/01/24/Blockbusters-Huizenga-buys-NFLs-Miami-Dolphins/9431759387600/
13. Deseret News, "NFL owners approve sale of Dolphins" (Mar. 24, 1994): https://www.deseret.com/1994/3/24/19099276/nfl-owners-approve-sale-of-dolphins/
14. UPI, "Robbie family settles Dolphin estate" (July 28, 1992): https://www.upi.com/Archives/1992/07/28/Robbie-family-settles-Dolphin-estate/3577712296000/
15. Tax Foundation, "Estate and Inheritance Taxes by State, 2026" (Oct. 12, 2026): https://taxfoundation.org/data/all/state/estate-inheritance-taxes/

Important information: This page is for general educational purposes only and is not tax, legal, or investment advice. Tax laws change, and their application depends on your specific facts. Consult your own estate planning attorney and CPA before acting. No trust or insurance structure is promised to achieve any particular tax result. Life insurance guarantees are subject to the financial strength and claims-paying ability of the issuing insurance company. Policy approval depends on underwriting. David Frederickson is a licensed life insurance and annuity agent with USA Wealth Builder (FL License #W827787). He is not a certified financial planner, attorney, or CPA, and does not provide tax or legal advice.