Irrevocable Life Insurance Trusts in Estate and Asset Protection Planning

An Irrevocable Life Insurance Trust (“ILIT”) is a trust that owns one or more life insurance policies. Its primary design and purposes are as follows:

  • is to avoid probate,
  • to avoid estate taxes on the death benefit,
  • protect proceeds from creditors of the insured and trust beneficiaries, and
  • provide a source of liquid funds that a trustee can determine when to distribute to the trust beneficiaries
  • If properly designed, the insured and their spouse can also be a beneficiary of the trust during their lifetimes.

The trust must be irrevocable in order to accomplish all of the above. However, the term ‘irrevocable’ does not necessarily mean that the creator of the trust, who is usually the insured, cannot change the trust terms or beneficiaries, indirectly though what is called a Trust Protector. That is because the Trust protector works for the trust creator.

So, the general plan is to create the trust prior to the purchase of the life insurance and have the trustee of the ILIT purchase the insurance and elect to have the ILIT named as both the owner and the beneficiary of the policy. However, in the event that the life insurance policy is owned outside of the trust (generally by the insured), the owner of the policy can set up the ILIT and then transfer the policy to the trust. If transferred by gift, the insured must live for three years in order to avoid the death benefit from being included in the insured’s taxable estate at death.

Single Life Insurance: The insured can create an ILIT that names any beneficiaries the insured chooses. However, in most cases the insured will name his or her spouse and descendants as beneficiaries of the trust. Gifts to the trust must come from the insured’s separate property, not from community property, if the insured’s spouse is a beneficiary in order to avoid estate taxes.

Survivorship Life Insurance: Because survivorship life insurance pays a death benefit at the death of the survivor of the insureds, the insureds will generally set up a two-grantor ILIT for the benefit of their descendants. As a note, this is not the only possible structure, but it is the most common. However, there’s nothing wrong with one of the insureds setting the ILIT up for the benefit of the other insured as long as neither insured is a trustee with powers over the insurance policy and as long as the beneficiary spouse’s non-general power of appointment over the trust excludes the power to appoint any insurance policies on his or her life, including survivorship policies.


ILITs are often funded with annual exclusion gifts by using so-called Crummey gifts which give certain beneficiaries the immediate power to withdraw the gifts for a period of time which is often 30 days.

However, the ILIT can also be funded using exemption gifts, especially where the premiums are higher than the annual exclusion gifts would cover. In fact, in this common situation for the high-net-worth client, the client will often gift a large income-producing asset to the trust in order to use the cash flow from the asset to pay the premiums.


I have observed that most estate planning attorneys draft ILITs to make mandatory distributions to the beneficiaries upon reaching certain ages. For example, many trusts pay out one-third upon the beneficiary reaching age 25, one-half of the balance upon the beneficiary reaching age 30 and the balance upon the beneficiary reaching age 35. This is commonly known as a Staggered Distribution Trust since the distributions are staggered over different time periods.

However, this trust design fails to consider the important tax and creditor and divorce protection benefits that can be obtained by keeping the assets in continuing trusts for the beneficiaries. As a result this structuring should be avoided. Therefore, the trust planner should instead draft the ILIT with continuing trusts after the insured’s death.

The simplest design is to use the primary beneficiary as sole trustee with distributions for health, education, maintenance and support. However, this trust design, although simple, does not provide the greatest degree of creditor and divorce protection and flexibility.

The better design, although more complex, is to use two trustees. In this design, the primary beneficiary is given the investment powers and an independent trustee, such as the primary beneficiary’s close friend or a corporate trustee, is given the power to make distributions in such co-trustee’s sole and absolute discretion. The primary beneficiary is given the power to remove and replace the trustees, but can only replace the distribution trustee with an unrelated party who is also not a subordinate employee.

This second design is generally fully protected from creditors and divorcing spouses because the beneficiaries do not have an enforceable right over distributions. Because the beneficiaries don’t have an enforceable right, their creditors and divorcing spouses do not have any right to access trust assets even where the applicable state’s statutory law and/or case law provides for exception creditors who would otherwise be able to access the trust assets.


The ILIT is an important tool for estate planners. The primary objective is generally to avoid estate taxes on the life insurance death benefit. However, the other important objective is to draft the trust to protect the policy and its death benefit from the creditors and divorcing spouses of the beneficiaries.

About the Author
D. Steven Yahnian has been a member of the California Bar and a practicing Attorney since 1980. He has also been a California CPA since 1984. Mr. Yahnian also holds the CFP® designation.

Mr. Yahnian practices in the following areas of law through YAHNIAN LAW CORPORATION:

  • Estate Planning & Administration
  • Asset Protection Planning
  • Tax Planning, Tax Debt Resolution and Tax Litigation
  • Business & Corporate Law and Planning
  • Real Property Law & Planning

As a CPA/CFP, Mr. Yahnian also has a separate accounting and tax return preparation practice called DSA ACCOUNTING.

Mr. Yahnian is a California State Bar Certified Specialist in the following
• Taxation Law and
• Estate Planning, Trust & Probate Law.

Mr. Yahnian received a B.S. degree in Accounting from USC, a J.D. from Loyola University of Los Angeles School of Law and an LL.M. in Taxation from New York University Law School. He also has a Certificate in Taxation from UCLA (with distinction). Mr. Yahnian also has an MS in Taxation* from UCLA (with Distinction).


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