Short answer: An irrevocable life insurance trust, or ILIT, removes a life insurance policy from your taxable estate by having the trust, not you, own the policy. With the 2026 federal estate and gift tax exemption at $15,000,000 per person, or $30,000,000 for a married couple, under Internal Revenue Code § 2010(c) as made permanent by the One Big Beautiful Bill Act, most Californians will never owe federal estate tax and do not need one. An ILIT still earns its keep if your total estate, including the insurance payout, could realistically approach that exemption, or if you want tighter control over how and when the death benefit reaches your beneficiaries.
What does an ILIT actually do?
An irrevocable life insurance trust owns your life insurance policy instead of you owning it personally. Because the trust holds the policy, the death benefit generally is not counted as part of your taxable estate when you die. You give up the ability to change or cancel the trust once it is created, and you cannot serve as your own trustee. Someone else, a trusted family member, friend, or professional fiduciary, has to hold that role.
The trust can also spell out exactly how the death benefit gets distributed. You can stagger payments by age, restrict funds to specific purposes such as education, or direct different shares to children from different marriages. None of that requires probate, since the trust holds the policy directly and pays out under its own terms.
Do I actually need one under the current exemption?
Probably not, unless your estate is large. For 2026, the federal estate and gift tax exemption is $15,000,000 per person, or $30,000,000 for a married couple. California has no state estate tax and no state inheritance tax, under Revenue and Taxation Code § 13301. If your total estate, including real property, retirement accounts, business interests, and life insurance, stays well under those numbers, a federal estate tax bill is not the problem an ILIT is built to solve.
Where an ILIT still earns its keep: a large life insurance payout can push an otherwise modest estate closer to the exemption line. Add a substantial death benefit to real property, retirement accounts, and other assets, and a family that looks nowhere near the threshold today can find itself much closer once the policy pays out. Business owners who carry large key-person or buy-sell policies are often the clearest case for an ILIT, since those policies are sized to match a company’s value, not a household’s ordinary net worth.
What about my spouse’s exemption?
A surviving spouse can add a deceased spouse’s unused federal exemption to their own through portability, but only if the first spouse’s executor files IRS Form 706 and affirmatively elects portability, even when no tax is otherwise due and a 706 would not normally be required. That election is made under Internal Revenue Code § 2010(c). Married couples also have an unlimited marital deduction for transfers to each other under § 2056(a), and a QTIP marital trust under § 2056(b)(7) is a separate planning tool for controlling where assets go after the surviving spouse dies. An ILIT and portability are not either-or. Some couples end up using both.
Are there downsides?
Yes. Once you fund an ILIT, you cannot get the policy back, change the beneficiaries yourself, or borrow against it. You also give up the flexibility to change course if your family situation shifts: a divorce, a new grandchild, a beneficiary who develops a creditor problem. If you make gifts to the trust to cover premiums, those gifts count against the annual gift tax exclusion, which for 2026 is $19,000 per recipient, or $38,000 for a married couple who elects to split gifts. Gifts above that amount generally require filing a Form 709, though no tax is actually owed until your cumulative lifetime gifts exceed the $15,000,000 exemption under Internal Revenue Code §§ 2010(c) and 2503(b).
Does an ILIT protect the money from creditors?
Generally, yes, while the funds stay in the trust rather than being distributed outright to a beneficiary. That is a separate benefit from the estate tax exclusion, and it can matter even for families who are nowhere near the federal exemption threshold, particularly where a beneficiary has creditor exposure or is going through a divorce.
What to do next
Add up your total estate, including any life insurance death benefit, before assuming you need or do not need an ILIT. If you are well under the federal exemption and your only goal is avoiding estate tax, simpler tools probably get you there. If your numbers are close to the exemption, you own a business, or you want tighter control over how insurance proceeds reach your beneficiaries, talk to an estate planning attorney about whether an ILIT fits your plan.
Figures verified July 2026.
Want a straight read on where you stand?
Talk to Eric. A free 30-minute call, no pitch. He’ll tell you where you’re exposed, what it would cost to fix, and what you can skip.
Talk to Eric