An irrevocable life insurance trust (ILIT) is a type of trust that is designed to hold one or more life insurance policies. It’s common for people to acquire life insurance inside of an ILIT — or to transfer life insurance into an ILIT. (You can read more about ILITs in our ILIT guide.) But in order to keep the insurance policy in place once it’s in the ILIT, you’ll need a plan for funding the premiums. This article discusses different ILIT funding strategies and when they might make sense.
Types of Insurance
There are two basic forms of life insurance: (1) term life insurance and (2) permanent life insurance. Either can be held by an ILIT.
How Does Term Life Insurance Work?
Term life insurance is generally very cheap, has monthly or annual premiums, lasts for a discrete term of years (the “term”), and has a death benefit (an amount your family gets paid if you pass away during the term) but no “cash value” (a standalone investment component, which we’ll discuss below).
So, for example, you might take out a 20-year term policy with a $1 million death benefit. The annual premiums will be a few thousand dollars (the exact premium amounts will depend on your age, health, and other factors). If you survive the 20-year term, the policy will lapse and pay out nothing. If you die before the end of the 20-year term, your named beneficiaries will receive the $1 million death benefit.
How Does Permanent Life Insurance Work?
Permanent insurance is designed to last for the insured’s whole life and usually includes both a death benefit and a standalone investment component, also known as the “cash value.” Permanent insurance tends to have higher insurance premiums. In some cases, the premiums are due annually; in other cases, you pay premiums for the first few years and then never again.
One type of permanent insurance that is becoming increasingly popular in part because of its tax advantages is Private Placement Life Insurance (PPLI). PPLI policies have relatively low fees, a large cash value component that allows you to maximize the income-tax benefits of life insurance, and a significant death benefit. The annual premiums for PPLI are typically $500,000 per year or more, which is unusually high even by the standards of permanent insurance.
Strategies for Funding ILITs
There are several ways to fund an ILIT. Here are the basic possibilities:
1.) Make annual exclusion gifts to the trust each year. For policies that have annual premiums that are relatively small (typically term life insurance policies), it’s common to just gift cash to the trust ahead of each premium due date. If the trust is set up to receive gifts that qualify for the gift tax’s annual exclusion, these gifts won’t use up any of the grantor’s gift and estate tax lifetime exemption amount. The gift tax annual exclusion is $19,000 per year (as of 2025), but if the ILIT has multiple beneficiaries, each beneficiary can claim a separate annual exclusion gift. For example, a trust for the benefit of three children can receive three annual exclusions worth of gifts each year or $57,000 per year.
This is the default strategy for funding term policies that have premiums small enough to be covered by annual exclusion gifts. Note: Since gifts to ILITs generally don’t qualify for the generation-skipping transfer (GST) tax annual exclusion, the grantor will still have to allocate GST exemption to these gifts.
2.) Make annual gifts to the trust, but not annual exclusion gifts. Sometimes people decide to fund ILITs annually but don’t want to use annual exclusion gifts to do so. Perhaps it’s because they’re already making annual exclusion gifts directly to the ILIT’s beneficiaries and don’t want to use their annual exclusion to fund the trust. Or perhaps it’s because the ILIT doesn’t have the “Crummey” provisions necessary to qualify the gifts for the annual exclusion (Valur can help set up trusts with these provisions at no cost). If the annual premiums are too large for annual exclusion gifts to fully fund the premiums, and the trust hasn’t been pre-funded (see below), some amount of annual gifting above the annual exclusion amount may be inevitable.
3.) Pre-fund the trust with the liquidity it will need to pay future insurance premiums. If you know the insurance premiums are too large to use the annual exclusions, you can pre-fund the trust with a large amount of liquidity. For example, if the premiums are $1 million per year for six years, you can put $6 million of liquid assets into the ILIT and then dip into that amount to pay the annual premiums. This is a common strategy for PPLI, since funding premiums with annual exclusion isn’t viable when premium payments are huge, as they inevitably are with PPLI.
4.) Put an income-producing asset into the trust. Sometimes people will put a piece of real estate or some other asset that throws off income into their ILIT, and then use the cash flow to pay the insurance premiums. When the insured dies, the heirs inherit both the life insurance proceeds and the income-producing asset. This is difficult to get right, but it is doable.
5.) Loan cash to the trust. It may be possible to loan cash to the ILIT so that the trustee can pay the premiums with the loan proceeds. There are a couple of issues with this approach, however. First, the loan will eventually need to be paid back, and the trust will need some source of liquidity at that point. Second, loaning too much money to an under-capitalized trust — whether an ILIT or otherwise — could cause estate tax issues.
6.) Pay the premiums yourself. Sometimes people just pay the insurance company directly, even though the trust is the actual policy owner. This creates an accounting mess and, because the payments are considered taxable gifts for gift tax purposes, it doesn’t have any tax benefits. It’s best to avoid this approach entirely.
Keep in mind that some of these strategies are not mutually exclusive. For example, it’s possible to combine #1 or #2 with #3 and/or #4.
What Strategy Makes Sense for You?
The best funding strategy in any given situation will depend on the size of the annual premiums, the total number of premiums due, and the grantor’s available liquidity. But there are some general guidelines to keep in mind.
People who are getting term policies and smaller permanent policies in ILITs will want to fund premiums with annual exclusion gifts. Doing so won’t use the grantor’s lifetime exemption amount. That’s particularly smart with term policies considering that most term policies never pay out (because the insured party survives the term).
People who are getting large permanent policies will want to pre-fund the trust with either liquidity or an income-producing asset. Pre-funding is attractive for people with large policies simply because it involves getting assets out of the grantor’s estate as soon as possible. That means that more appreciation will occur outside the grantor’s estate rather than inside it. In some cases, however, this won’t be possible because the grantor won’t have the spare liquidity to do it.
Conclusion
Acquiring an insurance policy inside of an ILIT is often a smart play — it gets the policy and its future death benefit outside of the grantor’s estate for estate tax purposes. But it’s important to give some thought as to how the premiums are going to be funded. Hopefully this article provides some helpful guidance.
About Valur
We’ve built a platform to give everyone access to the tax and wealth-building tools typically reserved for wealthy individuals with a team of accountants and lawyers. We make it simple and seamless for our customers to take advantage of these hard-to-access tax-advantaged structures. With Valur, you can build your wealth more efficiently at less than half the cost of competitors.
From picking the best strategy to taking care of all the setup and ongoing overhead, we make things simple. The results are real: We have helped create more than $3 billion in additional wealth for our customers. If you would like to learn more, please feel free to explore our Learning Center. You can also see your potential tax savings with our online calculators or schedule a time to chat with us!
