An irrevocable life insurance trust (ILIT) owns a life insurance policy on your life so that the death benefit is not included in your taxable estate. For Massachusetts families, where the state estate tax kicks in at $2 million — including the full face value of life insurance you own — an ILIT can save hundreds of thousands of dollars in estate taxes that would otherwise reduce what your family receives.
You need an ILIT when (1) your estate, including life insurance, will exceed the $2 million Massachusetts estate tax threshold or the $13.99 million federal threshold, and (2) you want the full death benefit to pass to your beneficiaries rather than being eroded by estate taxes.
Here is how it works, when it makes sense, and what families in Massachusetts need to know before setting one up.
How an ILIT Removes Life Insurance from Your Taxable Estate
When you personally own a life insurance policy and you die, the death benefit is included in your gross estate for both federal and Massachusetts estate tax purposes. A $2 million policy on top of a $1 million home and $500,000 in retirement accounts puts you at $3.5 million — well above the Massachusetts threshold — and triggers a state estate tax bill before your family sees a penny.
An ILIT solves this by being the legal owner of the policy. You do not own it. You cannot change the beneficiaries. You cannot borrow against it. You cannot surrender it. Because you do not own it and have no rights of ownership, the death benefit is not part of your estate when you die.
The trust receives the death benefit when you die. The trustee then distributes it to your beneficiaries — typically your spouse, your children, or both — according to the terms you established when the trust was created.
The Massachusetts $2 Million Cliff
Massachusetts estate tax operates on a cliff, not a credit. If your estate is below $2 million, no Massachusetts estate tax. If your estate is above $2 million by even a dollar, the entire estate above $40,000 is taxed, with rates climbing from 0.8% to 16% based on the 2025 Massachusetts estate tax brackets.
For families with substantial life insurance, the cliff effect is brutal. A schoolteacher with a $1.2 million home and a $1 million term policy is suddenly above the threshold. Without planning, that family pays Massachusetts estate tax on more than $2 million of value when most of their assets are illiquid (a house) or were intended specifically to provide for the surviving family (the life insurance).
An ILIT removes the insurance from the estate entirely, often pulling the family back below the cliff and eliminating the tax.
When an ILIT Makes Sense
You should seriously consider an ILIT if:
1. You own substantial life insurance and your estate is near or above the Massachusetts threshold. The classic case: family with a young breadwinner, a $2-3 million term policy to replace income for the surviving spouse and minor children, and a home that has appreciated significantly. The policy is essential for the family’s security but pushes the estate over the cliff.
2. You are buying new permanent life insurance for estate liquidity. Whole life or universal life policies designed to pay estate taxes — common for business owners or families with illiquid wealth like real estate or closely-held companies — are typically owned by an ILIT from day one. The whole point of the policy is to fund the tax bill, and putting it inside the estate would defeat the purpose.
3. Your estate is over the federal threshold ($13.99 million for 2025). At that level, the federal estate tax rate is 40%. Removing a multi-million-dollar policy from the federal estate creates substantial tax savings. The Tax Cuts and Jobs Act exemption is also scheduled to revert (currently sunsetting at the end of 2025 absent congressional action), which would cut the federal exemption roughly in half.
4. You want to provide liquidity to pay other estate taxes or expenses. An ILIT-owned policy can provide cash to your family at exactly the moment they need it — to pay estate taxes due nine months after death, to keep a business operating, or to avoid forced sale of real estate at a discount.
5. You want creditor protection for the death benefit. Properly structured ILIT-held proceeds are generally protected from your beneficiaries’ creditors as long as funds remain in the trust.
When an ILIT Probably Doesn’t Make Sense
An ILIT is not for everyone. You probably do not need one if:
- Your total estate, including life insurance, is comfortably below $2 million. The Massachusetts threshold may rise — and your assets may grow — but for now the tax planning benefit is theoretical.
- You only have small term policies through your employer. The administrative cost and complexity of an ILIT is not worth it for a $250,000 group term policy.
- You expect to need access to the cash value of the policy during your lifetime. Once you transfer a permanent policy to an ILIT, you cannot get the cash value back. Your spouse or children may benefit from it through the trust, but you personally cannot.
How an ILIT Is Set Up and Funded
The mechanics matter. A poorly executed ILIT defeats the purpose.
Setting Up the Trust
You work with an estate planning attorney to draft the ILIT. You select an independent trustee — typically not yourself, not your spouse if the policy insures your life and the spouse is a beneficiary, and ideally an institutional trustee or trusted third party. The trustee applies for and owns the policy.
Funding the Trust
If you are buying a new policy, the trust applies for and owns the policy from inception. You make annual cash gifts to the trust, and the trustee uses those gifts to pay the premiums.
If you are transferring an existing policy, you give the policy to the trust. Critical detail: the IRS imposes a three-year lookback period. If you die within three years of transferring an existing policy to an ILIT, the death benefit is pulled back into your estate as if the transfer never happened. This rule is why most attorneys recommend setting up an ILIT and buying a new policy through it rather than transferring existing coverage — the lookback only applies to transfers, not to policies the trust owned from day one.
Crummey Notices
Annual gifts to the ILIT must qualify for the federal annual gift tax exclusion ($19,000 per beneficiary in 2025). To qualify, the trust beneficiaries must have a temporary right to withdraw the gift — typically 30 days — and must receive written notice of that right. These are called Crummey notices, after the case that established the rule. The trustee sends a Crummey notice to each beneficiary every time a gift is made. Beneficiaries virtually never exercise the withdrawal right — they understand the gift is for premium payments — but the formal right has to exist for the IRS to respect the gift tax exclusion.
Failing to send Crummey notices is one of the most common ILIT compliance failures. The IRS has historically scrutinized this, and missed notices can convert what should have been gift-tax-free contributions into taxable gifts. The trustee needs a process — often documented annually — to confirm notices were sent and acknowledged.
Coordination with the Rest of Your Plan
An ILIT is one piece of a larger estate plan. Several coordination points matter:
- Spouse’s role. If your spouse is a beneficiary of the ILIT, the trust can be structured as a “spousal access trust” — providing income or principal to your spouse during their lifetime, then passing to your children. This is a powerful tool for couples who need flexibility but also want estate tax protection.
- Credit shelter trusts. Massachusetts couples often use credit shelter trust structures to capture both spouses’ $2 million exemptions. ILITs work alongside credit shelter trusts, not instead of them.
- Generation-skipping considerations. If you want the death benefit to skip your children and pass to grandchildren, the ILIT needs specific generation-skipping transfer (GST) tax planning. This is technical, but it can save another layer of estate tax at the next generation.
- Beneficiary designations on other accounts. Make sure your IRA, 401(k), and other beneficiary-designated assets coordinate with the ILIT structure. A surviving spouse who is the IRA beneficiary AND the ILIT income beneficiary may be over-funded; redirecting some assets through the trust may produce better long-term tax results.
Massachusetts-Specific Notes
A few things specific to Massachusetts ILIT practice:
- The Massachusetts estate tax does not include a marital deduction equivalent for ILITs — the death benefit is excluded outright.
- Massachusetts trustees are subject to the Massachusetts Uniform Trust Code, with default duties of loyalty, prudence, and impartiality. Naming a corporate trustee is often easier than naming a family member who has not served as a fiduciary before.
- Real-estate-heavy estates often benefit most from ILITs. Massachusetts homes in Andover, Boxford, Andover, Topsfield, North Andover, and similar communities have appreciated dramatically in recent years, often pushing families above the $2 million threshold without their realizing it. A life insurance trust is sometimes the cleanest way to provide the cash to pay estate taxes without forcing a sale of the family home.
Frequently Asked Questions
What is the main benefit of an ILIT? The main benefit is removing the life insurance death benefit from your taxable estate, which eliminates Massachusetts estate tax (and potentially federal estate tax) on the policy proceeds. For families above the $2 million threshold, the savings can be substantial.
Can I be the trustee of my own ILIT? No. Serving as trustee of your own ILIT would give you control over the policy, which would cause it to be included in your estate — defeating the purpose. The trustee should be a third party, ideally institutional or an independent trusted advisor.
Can I cancel an ILIT later? No. The “I” in ILIT stands for irrevocable. Once the trust is established and funded, you cannot revoke it. If circumstances change dramatically, the trust can sometimes be modified through a Massachusetts Probate and Family Court proceeding, but it is not simple.
What happens to the policy if I stop paying premiums? The trustee — not you — pays premiums from cash you gift to the trust. If you stop making gifts, the trustee may have to use cash value, take a loan against the policy, or let it lapse. ILITs that lapse can produce unexpected tax consequences.
Does an ILIT avoid probate? Yes. The death benefit passes to the trust, not through your estate. The trustee then distributes proceeds to beneficiaries under the trust terms. None of it goes through probate.
What is the three-year rule? If you transfer an existing life insurance policy you own into an ILIT, and you die within three years of the transfer, the IRS pulls the death benefit back into your estate as if the transfer never happened. The three-year rule only applies to transfers — policies the ILIT owned from day one are not subject to it.
Talk to an Estate Planning Attorney Before Setting One Up
ILITs are one of the most powerful estate tax planning tools available, but they are also technical. Improper drafting, missed Crummey notices, or a transfer that triggers the three-year rule can undo the entire benefit.
For estates approaching or above $2 million in total value (including life insurance), an ILIT is often one of the most consequential planning decisions on the table.
To discuss whether an ILIT makes sense for your estate and how to structure one properly, reach out through our contact form to schedule an estate planning consultation. We work with families across the Merrimack Valley and North Shore — Andover, North Andover, Reading, North Reading, Middleton, Georgetown, and surrounding communities.
Visit our services page to learn more about how we help Massachusetts families plan estates that protect what they have built.