# Irrevocable Life Insurance Trust (ILIT): Definition and How It Works in California

> An irrevocable life insurance trust, or ILIT, owns a life insurance policy so the death benefit stays out of the taxable estate.

Source: https://ridleylawoffices.com/estate-planning-glossary-california/irrevocable-life-insurance-trust/

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

An **irrevocable life insurance trust**, or ILIT, owns a life insurance policy so the death benefit stays out of the insured person’s taxable estate. The insured gives up control of the policy, and the trustee collects and distributes the proceeds after death.

## How it works in California

Ridley Law’s discussion of [whether you need an ILIT in your estate plan](https://ridleylawoffices.com/do-i-need-an-irrevocable-life-insurance-trust-in-my-estate-plan/) walks through when this trust makes sense. The federal estate tax rule behind it is 26 U.S.C. § 2042, which pulls life insurance proceeds into the insured’s gross estate whenever the insured held any “incidents of ownership” in the policy, such as the right to change the beneficiary or borrow against it. An ILIT works by making sure the insured never holds those rights; the trust itself owns the policy from the start, or from soon after it is set up.

Because an [irrevocable trust](https://ridleylawoffices.com/estate-planning-glossary-california/irrevocable-trust/) gives up control on purpose, the insured cannot amend the trust, change the beneficiary, or borrow against the policy once it is transferred in. If an existing policy is moved into the trust rather than the trust applying for a new one, 26 U.S.C. § 2035(a) pulls the death benefit back into the insured’s taxable estate anyway if the insured dies within three years of the transfer.

## Why it matters

The three-year rule can undo the whole point of the trust if the timing goes wrong. For example, a person transfers an existing life insurance policy into a new ILIT and dies fourteen months later; because the transfer happened within three years of death, the proceeds are pulled back into the taxable estate as if the ILIT never existed. Having the trust apply for a new policy directly, instead of transferring an old one in, avoids that risk entirely.

## Common mistakes

Transferring an existing policy into the trust instead of having the trust apply for a new one, which triggers the three-year rule. Letting the insured keep any incident of ownership, such as the right to change the beneficiary, which can undo the estate tax benefit. Naming the insured as trustee, which blurs the separation the trust depends on.

## Related terms

- [Irrevocable Trust](https://ridleylawoffices.com/estate-planning-glossary-california/irrevocable-trust/): the broader category of trust an ILIT belongs to.
- [Grantor Trust](https://ridleylawoffices.com/estate-planning-glossary-california/grantor-trust/): many ILITs are drafted to keep this status for income tax purposes even while excluded from the estate.
- [Generation-Skipping Transfer Tax](https://ridleylawoffices.com/estate-planning-glossary-california/generation-skipping-transfer-tax/): a separate federal tax an ILIT’s drafting sometimes has to account for.

Part of the [California estate planning glossary](https://ridleylawoffices.com/estate-planning-glossary-california/). For the full treatment, see [Do I Need an Irrevocable Life Insurance Trust in my Estate Plan?](https://ridleylawoffices.com/do-i-need-an-irrevocable-life-insurance-trust-in-my-estate-plan/)