Irrevocable Life Insurance Trusts

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If you own a life insurance policy in your own name, the death benefit goes straight into your taxable estate. That could mean a significant tax bill for your family. An Irrevocable Life Insurance Trust, commonly called an ILIT, is one of the most effective tools available to prevent that from happening. At Slowik Estate Planning, located in Atlanta, Georgia, we help families across the state use ILITs to protect their wealth and pass it on to the people they love. This page explains how ILITs work, what Georgia law says about them, and why now is a smart time to act.

Table of Contents

What Is an Irrevocable Life Insurance Trust?

An ILIT is a trust designed to own one or more life insurance policies on your life. It is an irrevocable trust structured to hold one or more life insurance policies, typically insuring the life of the grantor. The key word here is “irrevocable.” Once you create the trust and transfer the policy into it, you give up ownership and control of that policy. That might sound like a drawback, but it is actually the whole point.

The primary reason for having an ILIT own a life insurance policy is to keep the insurance proceeds out of the grantor’s estate for estate tax purposes. When a grantor owns insurance on his or her own life, the proceeds will be included in the grantor’s taxable estate. When an ILIT owns the insurance, the proceeds typically will not be included in the grantor’s taxable estate. That distinction can mean the difference between your family receiving the full death benefit or watching a large portion of it go to the IRS.

Under federal law, Section 2042 requires the inclusion in the gross estate of the proceeds of insurance on the decedent’s life if the decedent possessed at the date of his death any of the incidents of ownership in the policy. However, if the decedent did not possess any of such incidents of ownership at the time of his death nor transfer them in contemplation of death, no part of the proceeds would be includible in his gross estate under section 2042. An ILIT is specifically designed to satisfy that standard.

So what counts as an “incident of ownership”? Generally speaking, the term “incidents of ownership” refers to the right to the economic benefits of the policy. It includes the power to change the beneficiary, to surrender or cancel the policy, to assign the policy, to revoke an assignment, to pledge the policy for a loan, or to obtain a loan against the surrender value. When the ILIT owns the policy instead of you, you no longer hold any of those rights, and the death benefit stays out of your estate.

With an ILIT, the trustee (someone other than the insured) takes ownership of the policy and pays the premiums, usually with funds contributed to the ILIT by the grantor. Upon the death of the insured, the life insurance proceeds will be paid to the ILIT, to be held and used for the beneficiaries of the ILIT as provided in the governing trust document. This structure keeps everything clean, legal, and effective.

How ILITs Work Under Georgia Law

Georgia trusts are governed by the Georgia Trust Code, found in Title 53, Chapter 12 of the Official Code of Georgia Annotated (O.C.G.A.). If you want to set up an ILIT in Atlanta or anywhere else in Georgia, your trust must comply with this code. Understanding the rules helps you avoid costly mistakes.

First, the trust must be properly drafted and funded. The first step is crafting a comprehensive trust document. This outlines the trust’s purpose, who will serve as the trustee, who the beneficiaries are, and how assets will be managed or distributed. The document must explicitly state that the trust is irrevocable. From there, the life insurance policy is either transferred into the trust or the trust purchases a new policy directly.

Georgia law requires you to name a trustee (individual or institution) to oversee and manage the trust’s assets, follow its terms, and act in the interests of beneficiaries. The trustee’s role is significant, as they are legally obligated to fulfill fiduciary duties and meet all reporting requirements. You cannot serve as your own trustee in an ILIT if you want the death benefit excluded from your estate. The trustee must be someone independent, such as a trusted family member, friend, or professional fiduciary.

One thing that surprises many people is that Georgia law does allow some flexibility with irrevocable trusts. During the settlor’s lifetime, the court shall approve a petition to modify or terminate an irrevocable trust, even if the modification or termination is inconsistent with a material purpose of the trust, if the settlor and all qualified beneficiaries consent to such modification or termination and the trustee has received notice of the proposed modification or termination. This does not mean you can casually change your ILIT whenever you like. It means that under the right circumstances, with proper legal guidance, some adjustments may be possible.

Georgia also updated its trust laws in 2018 through House Bill 121, which added a decanting statute under O.C.G.A. § 53-12-62. The second set of major updates to the Trust Code provide much-needed flexibility for grantors and trustees to modify existing irrevocable trusts. As trust and tax law has evolved over time, it has become imperative to be able to change administrative provisions of trusts to keep up with the ever-changing law. The new statute provides for methods of modifying existing trust agreements as well as modifying a trust agreement by decanting, which is transferring the assets of one trust into another trust. This is a powerful tool when circumstances change after the trust is created.

Proper trust administration is critical. Georgia law requires trustees to keep beneficiaries informed, maintain detailed records, and file tax returns under the trust’s assigned tax identification number. Failing to follow these rules can jeopardize the entire tax strategy.

The Tax Benefits of an ILIT in 2026

The tax landscape in 2026 makes ILITs more relevant than ever. With the federal estate and gift tax exemption now confirmed at $15 million per individual for 2026, many high-net-worth families are reviewing advanced planning strategies. Recent IRS guidance has solidified this higher threshold, giving affluent individuals more room before facing the 40% federal estate tax, but life insurance proceeds can still push estates over the limit. Even with a $15 million exemption, a large life insurance policy can create unexpected tax exposure.

Think about this example: You have $14 million in assets and a $6 million life insurance policy. Without an ILIT, your estate totals $20 million upon death, triggering federal estate tax on the excess above the $15 million exemption. With the policy inside a properly structured ILIT, your taxable estate stays at $14 million, meaning no federal estate tax. That is a significant difference for your family.

There is also an important rule to know about transferring existing policies. Note the important three-year rule: if you transfer an existing policy into an ILIT and pass away within three years, the proceeds are pulled back into your estate for tax purposes. New policies purchased by the trust avoid this issue entirely. This is one reason why working with an experienced attorney before making any moves is so important.

Another key tax benefit involves the step-up in basis rules. Under IRS Revenue Ruling 2023-2, assets held in an irrevocable trust that are not included in the grantor’s gross estate do not receive a stepped-up basis at death. This means that if the trust holds appreciated assets, the beneficiaries will inherit those assets at the original cost basis, not the fair market value at death. For an ILIT, this is typically not a concern because life insurance proceeds are generally received income-tax-free under IRC § 101(a). However, it is one more reason why careful planning and drafting matters.

Georgia has no state-level estate tax, which is good news for Georgia residents. However, federal estate tax still applies. Thoughtful Estate Tax Planning in Atlanta Georgia can help you take full advantage of the available exemptions while using tools like an ILIT to keep life insurance proceeds out of the taxable estate entirely.

Funding Your ILIT: Crummey Powers and Annual Gift Tax Exclusions

Once your ILIT is created, you need to fund it so the trust can pay the life insurance premiums. You do this by making gifts to the trust each year. But there is a catch. Gifts to a trust are normally considered “future interest” gifts, which do not qualify for the annual gift tax exclusion. To fix that problem, most ILITs include what are called “Crummey powers.”

Many ILITs include so-called “Crummey” powers for the beneficiaries. A Crummey power enables a beneficiary to withdraw part or all of the grantor’s contribution to the ILIT. This is used to allow those contributions to be treated as “present interest” gifts so that they can qualify for the annual exclusion from gift taxes, rather than consume a portion of the grantor’s lifetime gift exemption.

The annual gift tax exclusion for 2026 allows you to give up to a set amount per recipient each year without using any of your lifetime exemption. By giving the trust beneficiaries a short window (typically 30 to 45 days) to withdraw the gifted funds, the contribution qualifies as a present interest gift. In practice, beneficiaries rarely exercise this right because they understand the long-term purpose of the trust. But the withdrawal right must be genuine and properly documented for the strategy to work.

If the ILIT terms are not followed, the IRS may attempt to disregard the ILIT and include the insurance proceeds in the insured’s estate. The IRS can also disallow the premiums from qualifying for the annual gift tax exclusion. This is why the process must be handled carefully and consistently every year.

If the grantor transfers an existing policy to an ILIT, the grantor will generally be required to report the value of that gift on a federal gift tax return. In addition, if the grantor contributes cash to the ILIT to pay premiums, those contributions will generally also be treated as reportable gifts. These gifts may or may not result in a current gift tax liability. Proper planning and recordkeeping can minimize or eliminate any gift tax consequences.

Despite these complications, many find ILITs to be attractive because they can make relatively small gifts (the value of the premiums) to get a much larger amount (the proceeds) out of their estates. That trade-off is often one of the most cost-effective moves in estate planning.

Additional Benefits: Asset Protection, Liquidity, and Multi-Generational Planning

Reducing estate taxes is the most well-known benefit of an ILIT, but it is far from the only one. ILITs can also help meet a variety of other goals, such as protecting assets from creditors, providing liquidity to help cover estate taxes, or leaving money to grandchildren and subsequent generations. These benefits make ILITs useful for a wide range of families, not just those facing estate tax exposure.

Asset protection is a major draw. Outside of an ILIT, a death benefit may be subject to claims if a beneficiary is divorced, or from creditors or lawsuits if a beneficiary runs into financial or legal trouble. Or parents or grandparents may have concerns about whether younger family members are prepared to responsibly handle a large influx of wealth. As with other trusts, a key advantage of ILITs is the ability to protect the death benefit from those external threats.

Liquidity is another powerful benefit. Life insurance is used for many purposes, such as replacing the insured’s income after death or providing liquidity to an otherwise illiquid estate. When an ILIT collects insurance proceeds, it will often use them to make a loan to the insured grantor’s estate or to purchase illiquid assets, such as real estate or closely-held stock, from that estate. That additional liquidity may help the estate pay an estate tax liability, pay off debt, or help with estate administration expenses.

For families with international ties, an ILIT can also play a role in cross-border planning. International Estate Planning involves unique tax and legal considerations, and a properly structured ILIT can help keep life insurance proceeds out of both U.S. and foreign taxable estates, depending on the structure.

An ILIT also works well alongside other estate planning documents. When combined with a well-drafted set of wills and other trust arrangements, an ILIT can be part of a comprehensive plan that covers every angle of your estate. The goal is to make sure your family receives the most from what you have worked hard to build, with as little friction and tax exposure as possible.

At Slowik Estate Planning in Atlanta, Georgia, we work with clients to design estate plans that fit their specific goals. Every family is different, and every plan should reflect that. If you are ready to learn whether an ILIT makes sense for your situation, we encourage you to reach out to our team today. We serve clients throughout Atlanta and the surrounding areas of Georgia and are here to help you make informed decisions about your future.

FAQs About Irrevocable Life Insurance Trusts in Atlanta, Georgia

Can I be the trustee of my own ILIT?

No, you should not serve as the trustee of your own ILIT. If you retain control over the policy as trustee, the IRS may treat you as holding “incidents of ownership” under IRC § 2042, which would pull the life insurance proceeds back into your taxable estate. You need to name an independent trustee, such as a trusted adult family member, a close friend, or a professional fiduciary. The trustee manages the trust, sends Crummey notices to beneficiaries, and pays the premiums, all without your direction or control.

What happens to the ILIT after I pass away?

When you die, the life insurance company pays the death benefit directly to the ILIT. The trustee then administers those proceeds according to the terms of the trust document. The trustee may distribute funds outright to your named beneficiaries, hold the funds in continuing trusts for minor children or grandchildren, or use the proceeds to provide liquidity to your estate by purchasing assets or making loans. Because the ILIT is irrevocable and the proceeds are not part of your estate, the distribution happens without probate and without federal estate tax on the death benefit.

Is it too late to set up an ILIT if I already have a life insurance policy?

It is not too late, but there are important timing considerations. If you transfer an existing policy into an ILIT and you pass away within three years of that transfer, the IRS will include the policy proceeds in your taxable estate under IRC § 2035. This is known as the three-year rule. One way to avoid this issue is to have the ILIT purchase a brand-new policy rather than transferring an existing one. If you already own a policy, your attorney can help you evaluate the best approach given your age, health, and overall estate plan.

Can an ILIT be changed or revoked after it is created?

Generally, no. An ILIT is irrevocable, which means you cannot simply change your mind and undo it. That said, Georgia law under O.C.G.A. § 53-12-61 does allow for court-approved modification or termination of an irrevocable trust under limited circumstances, such as when the settlor and all qualified beneficiaries consent. Georgia also has a decanting statute under O.C.G.A. § 53-12-62 that allows a trustee to transfer trust assets into a new trust under certain conditions. These options require legal guidance and do not make an ILIT casually flexible. The permanence of the arrangement is what makes the tax benefits possible.

Who should consider setting up an ILIT in Georgia?

An ILIT is worth considering if you own a significant life insurance policy and your total estate, including that policy, could approach or exceed the federal estate tax exemption. It is also a strong option if you want to protect the death benefit from your beneficiaries’ creditors or divorcing spouses, if you need liquidity in your estate to cover taxes or debts without forcing the sale of property, or if you want to provide structured, long-term support for children or grandchildren. Business owners with key-person life insurance policies and individuals with international assets may also benefit. Every situation is different, so speaking with Slowik Estate Planning in Atlanta, Georgia is the best way to determine whether an ILIT fits your goals. Past results in any specific case do not guarantee similar outcomes in your situation.

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