Irrevocable Life Insurance Trust (ILIT): How It Works in California (2026)

By Eric Ridley, attorney, Ridley Law. Updated October 2026.

Estate size this page covers: estates near or above the $15 million federal exemption, $30 million for a married couple, where an ILIT keeps the death benefit out of a 40% tax. Below that line an ILIT is a control, creditor and blended-family tool, and the tax reasons fall away.

What is an irrevocable life insurance trust (ILIT)?

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. The trust is irrevocable, so you give up the ability to change or cancel it once it is created. You also cannot serve as your own trustee. Someone else, a trusted family member, friend, or professional fiduciary, has to hold that role.

The trust also controls how the money reaches your family. 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. The irrevocable life insurance trust glossary entry has the short definition, and our life insurance estate planning guide covers how policies fit into a plan generally.

How does an ILIT work?

A policy on your life is part of your taxable estate if you own it, or hold any right to control it, when you die. An ILIT takes you out of that picture. The trustee owns the policy and is also its beneficiary, so the death benefit is paid to the trust and not to you or your estate.

1. You sign the trust and name a trustee.

   The trustee can’t be you. The trust names who receives the proceeds and when.

2. The trustee gets the policy.

   Usually the trustee applies for a new policy on your life, so the trust owns it from day one. You can also transfer a policy you already own, which brings in the three-year rule below.

3. You give the trust money for premiums.

   You make gifts to the trust each year. The trustee uses that money to pay the premiums from a trust account, never from your personal account.

4. The trustee sends Crummey notices.

   Each gift triggers a written notice to the beneficiaries, which is what lets the gift qualify for the annual exclusion. More on that in the next section.

5. At your death, the trustee collects and distributes.

   The insurer pays the trust. The trustee follows the trust terms, with no court involved.

Why incidents of ownership matter (IRC § 2042)

Under Internal Revenue Code § 2042, the gross estate includes life insurance proceeds if the insured possessed any “incidents of ownership” at death, “exercisable either alone or in conjunction with any other person.” So the trust is irrevocable and you generally can’t be the trustee. If you keep a power over the policy, you’ve put the proceeds back in your estate.

What are Crummey letters and withdrawal powers?

Crummey letters are the written notices a trustee sends to ILIT beneficiaries each time you add money to the trust. Each notice tells the beneficiary they have a temporary right to withdraw their share of the gift, usually for 30 days, though the trust sets the window. Nobody expects the beneficiaries to take the money. The right exists because a gift only qualifies for the annual gift tax exclusion if it’s a present interest, and a withdrawal right makes it one.

The name comes from Crummey v. Commissioner, 397 F.2d 82 (9th Cir. 1968), a case from a California family’s trust. The trust gave each child a right to demand a share of each year’s additions. The Ninth Circuit held the gifts to the two minor children qualified for the exclusion, even though no guardian had been appointed to make a demand for them, and reversed the Tax Court on that point.

For 2026 the annual exclusion is $19,000 per recipient, or $38,000 for a married couple who elect to split gifts. As an example, suppose you have three beneficiaries with withdrawal rights. You can give the trust up to $57,000 in 2026 without using any of your lifetime exemption, and a married couple splitting gifts can give $114,000. If the premium is higher than your exclusion room, the excess uses part of your lifetime exemption and generally requires a Form 709 gift tax return.

Under IRC § 2514(e), when a beneficiary lets a withdrawal right lapse, the lapse is treated as a release of a power to the extent it exceeds the greater of $5,000 or 5 percent of the trust assets the power could be satisfied from. The trust document has to be drafted with that limit in mind.

What is the three-year rule for an ILIT?

If you transfer a policy you already own to an ILIT and die within three years, the proceeds are pulled back into your taxable estate. That’s IRC § 2035(a), which reaches transfers of an interest in property “during the 3-year period ending on the date of the decedent’s death” when the property would have been included under § 2042 had you kept it.

The simplest way around it is to have the trustee buy a new policy on your life. The trust owns it from the start, so you never transferred anything. If you’re older or uninsurable and need to keep an existing policy, the transfer still can make sense, but you’re betting on outliving the three years.

How should Crummey notices be handled?

Send a written notice after every contribution and give the beneficiaries a real window to withdraw, because Crummey v. Commissioner, 397 F.2d 82 (9th Cir. 1968), Estate of Cristofani v. Commissioner (1991) 97 T.C. 74, and Estate of Turner v. Commissioner, T.C. Memo. 2011-209, each turned on whether the beneficiary had a legal right to withdraw.

Cristofani is another California family. Maria Cristofani’s trust let her children and five grandchildren withdraw up to the annual exclusion amount within 15 days after each contribution. The grandchildren were only contingent beneficiaries, and none of them ever withdrew. The full Tax Court still allowed an annual exclusion for each grandchild, because the right to withdraw was real and there was no agreement or understanding that they wouldn’t use it. The test, the court said, is not whether the beneficiary is likely to take the money but whether the trustee could legally resist the demand.

Turner went further than anyone should rely on. The decedent paid the premiums straight to the insurer, and the IRS argued the withdrawal rights were illusory because the beneficiaries got no notice. The Tax Court allowed the exclusions anyway, holding that whether the beneficiaries knew of their right “does not affect their legal right to do so.” It is a memorandum opinion, and the IRS’s position on notice hasn’t gone away. The warning above still stands.

Deposit each gift into the trust’s own account before the premium is due, never straight to the insurer. Send each beneficiary, or a minor’s parent or guardian, a dated written notice of the gift and the withdrawal window. Keep signed acknowledgments with the trust records. Don’t have any side understanding that nobody will withdraw.

Does an ILIT need GST exemption?

Usually yes, if grandchildren or later generations can benefit, because annual-exclusion gifts to a trust with more than one beneficiary don’t automatically get a zero inclusion ratio under IRC § 2642(c)(2), and the 2026 generation-skipping transfer tax exemption is $15,000,000 (Rev. Proc. 2025-32).

A gift that qualifies for the annual exclusion is free of the generation-skipping transfer (GST) tax only if the trust is for one individual, nothing can be distributed to anyone else during that person’s life, and the trust assets will be in that person’s estate if the trust outlasts them (IRC § 2642(c)(2)). A typical ILIT for children and grandchildren fails that test. The Code allocates unused GST exemption automatically “to the extent necessary to make the inclusion ratio for such property zero” only for gifts to a “GST trust” (IRC § 2632(c)). Many ILITs aren’t GST trusts under that definition, for example one that requires or allows a child to take more than 25 percent of the trust before age 46 (IRC § 2632(c)(3)(B)). So don’t count on the automatic rule. An ILIT meant to last for generations should get its allocation on purpose, on a timely Form 709 each year a gift is made. Generation-skipping trusts in California covers the rest of the GST rules.

Do I need an ILIT in 2026?

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, under Internal Revenue Code § 2010(c) as amended by the One Big Beautiful Bill Act, and the amount is indexed for inflation for decedents dying after 2026. California has no state estate tax and no state inheritance tax, under Revenue and Taxation Code § 13301. Our California estate tax guide explains what that means in practice. 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.

An ILIT still makes sense in these situations:

• Your estate is near or above the exemption. A large death benefit added to real property, retirement accounts, and other assets can push a family that looks nowhere near the threshold today close to it once the policy pays. Our estate and inheritance tax guides cover the wider set of tools.
• Your estate is illiquid. A business, a farm, or rental real estate can leave heirs with no cash and a hard decision. Insurance owned by the trust gives the family money without forcing a sale. Business owners with large key-person or buy-sell policies, sized to a company’s value and not a household’s net worth, are often the clearest case. See key person insurance and buy-sell agreements.
• It’s a second marriage. The trust can guarantee that a fixed amount reaches children from a first marriage, whatever the surviving spouse does later. See blended family estate planning.
• A beneficiary has creditor or divorce exposure. Proceeds held in trust are harder for a beneficiary’s creditors to reach than proceeds paid outright. See spendthrift trusts and creditor protection.
• A beneficiary receives means-tested benefits. The ILIT can pay into a special needs trust so the inheritance doesn’t disrupt eligibility. See our special needs trust guide.

If none of those fits and your estate is well under $15,000,000, you can usually skip it and name a revocable trust as the policy beneficiary instead.

ILIT pros and cons

Topic	Advantage	Drawback
Federal estate tax	The death benefit stays out of your taxable estate if the trust owns the policy properly.	Doesn’t help if your estate is far below the exemption. The three-year rule applies to transferred policies.
Control	You set when and how beneficiaries are paid.	You can’t change the trust, take the policy back, or borrow against it.
Creditors and divorce	Proceeds held in trust generally stay protected from a beneficiary’s creditors.	Protection ends when funds are distributed outright.
Trustee	A trusted person or professional manages the money.	It can’t be you. You depend on someone else doing the paperwork.
Gifts for premiums	Gifts within the annual exclusion cost no lifetime exemption.	Gifts above the exclusion require a Form 709 and use exemption.
Cost and upkeep	One-time drafting, then routine administration.	Annual notices, a separate trust bank account, and a separate tax ID.
Flexibility	The terms can match your family.	You can’t adjust for a divorce, a new grandchild, or a beneficiary who develops a creditor problem.

The downsides are real. Once you fund an ILIT, you cannot get the policy back, change the beneficiaries yourself, or borrow against it. Gifts above the annual exclusion generally require filing a Form 709, though no tax is owed until your cumulative lifetime gifts exceed the $15,000,000 exemption under Internal Revenue Code §§ 2010(c) and 2503(b).

How much does an ILIT cost, and what does the trustee do?

Expect a legal fee to draft the trust, then ongoing premium costs, which depend on your age, health, and the policy. Ask for a flat quote that covers drafting and setup. The ongoing administration is light but not optional. The trustee:

• Gets a separate tax ID. The IRS says a trust needs its own EIN, except certain grantor-owned revocable trusts, and an ILIT is irrevocable.
• Opens a trust bank account and pays every premium from it.
• Sends Crummey notices after each gift and keeps copies.
• Keeps records of gifts, notices, and premiums.
• Collects the death benefit and distributes under the trust.

An individual trustee can handle this, but a trustee who forgets the notices creates a tax problem for you. See the duties in trustee liability in California.

Who should be the trustee of an ILIT?

Someone other than the insured, because the estate tax regulations treat a power over the policy held “as trustee or otherwise” as an incident of ownership (Treas. Reg. § 20.2042-1(c)(4)).

The insured’s spouse can serve, and often does, but a spouse who is also a beneficiary should be limited to distributions for health, education, support and maintenance. A power limited by that ascertainable standard isn’t a general power of appointment (IRC § 2041(b)(1)(A)), so the trust stays out of the spouse’s estate too. The HEMS standard page has the wording. Anything broader belongs with an independent co-trustee. An adult child, a trusted friend or a professional fiduciary can serve, and a professional is worth the fee when the policy is large or the family is likely to argue.

California holds a trustee who invests trust assets to the prudent investor rule, but “the settlor may expand or restrict the prudent investor rule by express provisions in the trust instrument” (Prob. Code § 16046(b)). Many ILITs use that to relieve the trustee of any duty to diversify away from the policy, while still requiring the trustee to keep the policy in force and watch for a lapse.

Split-dollar and premium financing, at overview depth

When premiums are larger than the annual exclusions and the family doesn’t want to use lifetime exemption, two structures come up. Split-dollar is an arrangement between the owner of a policy and someone else in which one party pays premiums and is entitled to recover them from, or secured by, the policy proceeds (Treas. Reg. § 1.61-22(b)(1)). The regulations tax it in one of two ways, as an economic benefit under § 1.61-22 or as a series of loans under § 1.7872-15, and the two parties must treat it consistently. Premium financing uses a bank loan to pay the premiums, with the policy and often other assets as collateral. Both carry interest-rate, collateral and exit risk that has to be modeled before anyone signs. The premium-financed life insurance page covers the bank-loan version and how it fails. Nothing here is a recommendation of any policy or carrier.

What did Connelly v. United States change for business-owned policies?

Connelly v. United States (2024) 602 U.S. 257 held that life insurance a corporation collects to redeem a deceased owner’s shares increases the company’s value for estate tax, and the company’s obligation to redeem the shares at fair market value doesn’t offset it.

The Connelly brothers’ company carried $3.5 million of insurance on each brother to fund a buy-back. After Michael died, the IRS counted $3 million of proceeds as a company asset and valued the company at $6.86 million, and assessed an additional $889,914 of estate tax. The Supreme Court unanimously upheld that result. It noted that a cross-purchase agreement, in which the owners buy policies on each other, would have kept the proceeds out of the company, with its own drawbacks. For an owner who also has an ILIT, the question becomes who owns which policy: the company, the other owners, or a trust. See buy-sell agreements and key person insurance.

What does an ILIT save? A worked example

On these assumptions, moving a $10 million policy into an ILIT saves $4.0M of federal estate tax, so the family keeps the full death benefit instead of $6.0M.

The person is hypothetical: a single California resident in 2026 with a $30 million estate and no unused exemption from a late spouse. The trustee buys a new $10 million policy, so the three-year rule never applies, and the premium gifts fit inside the annual exclusions. The exemption is $15,000,000 and the tax is 40% of the excess (IRC § 2001(c)). If the policy is owned personally, the death benefit is part of the taxable estate under § 2042.

For a married couple the same math usually runs at the second death, often with a survivorship policy, and portability can add the first spouse’s unused exemption. The estate tax exposure calculator runs your own numbers.

Cases won and lost

What changes in California

The ILIT is a federal tax tool. California has no estate tax, so a California resident uses one for federal exposure, control, and protection. If you want more background on how this type of trust differs from a living trust, read revocable vs irrevocable trusts in California and our irrevocable trust attorney page.

Premiums paid from community property

When ILIT premiums come out of community funds, a problem arises that the federal forms don’t show. Each spouse’s interest in community property is “present, existing, and equal” (Fam. Code § 751), and neither spouse may give away community personal property without the other’s written consent (Fam. Code § 1100(b)). When community money pays the premium, the non-insured spouse is a donor of half of it. If that spouse is also a beneficiary of the ILIT, she has funded part of a trust for herself, which invites estate inclusion under IRC § 2036 for her share and lets her creditors reach what the trustee could pay her, “not exceeding the amount of the settlor’s proportionate contribution to the trust” (Prob. Code § 15304(b)).

One fix is to keep the non-insured spouse out of the beneficiary class. The other is to convert the premium money into the insured spouse’s separate property first, with a written transmutation that meets Fam. Code § 852(a). Under Estate of MacDonald (1990) 51 Cal.3d 262, that writing has to say expressly that the ownership of the property is changing. A consent line on a form doesn’t do it. Transmutation agreements covers the drafting.

An existing community-property policy

State property law also decides who held the incidents of ownership in a policy bought with community funds, and the estate tax regulations say so directly (Treas. Reg. § 20.2042-1(c)(5)). Transferring such a policy to an ILIT is a gift by both spouses, and the insured’s half still faces the three-year rule. A new policy bought by the trustee avoids both problems.

What are the alternatives to an ILIT?

• Revocable trust as beneficiary. You keep the policy, name your revocable trust as beneficiary, and the proceeds pass under its terms. It keeps control and skips probate, but the proceeds count in your estate. See revocable trusts.
• SLAT. A spousal lifetime access trust removes assets from your estate while your spouse can still benefit. Whether you still need one under the 2026 rules is covered in SLAT trusts after the 2026 tax law.
• Annual gifts. Under the 2026 gift tax rules, you can give $19,000 per person each year without any filing.

What works and what fails

Working with Ridley Law

The call is for California families near or over the federal exemption, business owners with buy-sell insurance, and couples paying premiums out of community property, who are weighing whether an ILIT is worth the paperwork. I work alongside your CPA and, where the matter calls for it, co-counsel. Work at this level is built for each family and quoted in writing before any drafting starts. The first call is free and runs 30 minutes, by phone or Zoom. For the wider set of tools at this size, see high net worth estate planning in California.

Book my 30-minute call or call 805-244-5291.

Frequently asked questions

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. See estate tax portability in California.

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 benefit is separate 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.

Can I be my own trustee?

No. If you hold powers over the policy at death, § 2042 pulls the proceeds into your estate. Name someone else.

How long should the Crummey withdrawal window be?

Long enough to be real. The trust in Estate of Cristofani gave 15 days after each contribution, and the Tax Court allowed the exclusions. The trust in Estate of Headrick gave 30 days. The trust document sets the window, and the notice should go out promptly so the beneficiary has time to use it.

Do annual exclusion gifts to an ILIT avoid the generation-skipping tax automatically?

Only for a trust with a single beneficiary that meets IRC § 2642(c)(2). A typical ILIT for children and grandchildren needs GST exemption allocated to it. The automatic allocation under § 2632(c) reaches only trusts that meet the Code’s “GST trust” definition, and many ILITs don’t, so allocate on a timely Form 709.

Can I pay ILIT premiums from community property in California?

You can, with your spouse’s written consent, but if your spouse is also a beneficiary, half of each premium is your spouse funding a trust for himself or herself. That invites estate inclusion and creditor access to that share. Pay from separate property after a written transmutation, or leave the non-insured spouse out of the beneficiary class.

Should my company own the life insurance that funds our buy-sell agreement?

Not without thinking through Connelly v. United States (2024) 602 U.S. 257. When the company collects the proceeds to redeem a deceased owner’s shares, the proceeds raise the value of those shares for estate tax. A cross-purchase structure, or policies held by each owner’s trust, avoids that result with drawbacks of its own.