An Irrevocable Life Insurance Trust removes the death benefit of a life insurance policy from your taxable estate, so that it goes to your family, and not the IRS or DOR.

When you die everything that you own is part of your taxable estate. This includes the death benefit of any life insurance policies. If your taxable estate is over $1 million, then you will owe an estate tax to the Massachusetts Department of Revenue (DOR), and if it's over $11 million (subject to periodic adjustments), then you'll also owe an estate tax to the IRS.

Any parent of young children should have at least $500,000 to $1 million in term life insurance coverage. So even young families with modest wealth may be subject to Massachusetts estate taxes. The Massachusetts estate tax is on a sliding scale of up to 16%. But for illustration, a taxable estate of $1.2 million would pay a Massachusetts estate tax of around $45,000. So you can see how life insurance can have tremendous tax consequences for modest families.

For wealthy families over the federal threshold, the impact is even more dramatic. This is because the federal estate tax is at a much higher rate, currently 40% of assets above the threshold. And taxpayers subject to the federal estate tax are also subject to the Massachusetts estate tax, which means that the total estate tax rate can be upwards of 50%!

Fortunately taxation of life insurance death benefits can be easily avoided through an Irrevocable Life Insurance Trust (ILIT). The idea is that because the trust is irrevocable, the insured does not actually own the insurance policy, and therefore it is not part of their taxable estate.

In order to achieve this advantaged tax treatment, we have to follow certain rules regarding the payment of insurance premiums. First, the trust must purchase the policy, or the owner must transfer it to the trust. If the owner transfers it, they must file a Gift Tax Return (IRS Form 709) and declare the cash value. Then the grantor/insured must transfer premium payments to the ILIT, usually on an annual basis. The Trustee then sendsCrummey Letters to the ILIT beneficiaries, informing them of their temporary right to withdraw the premiums. These Crummey rights allow the IRS to interpret the premium transfers as present interests, which can pass free of gift taxes, if under $14,000 per beneficiary per year (doubled if gift splitting with a spouse). The Trustee then pays the premiums to the insurance company.

When the insured eventually passes away, the insurance company pays the death benefit to the ILIT, and the Trustee administers the trust for the beneficiaries, typically according to the same provisions as the insured's Revocable Trust. The important distinction is that the ILIT is not subject to the grantor/insured's estate taxes.


We're glad that you're using this website to educate yourself about these important issues. While it may seem daunting, the most important step is as simple as a phone call or email.


The Law Office of David E. Peterson


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Beverly, MA 01923

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Burlington, MA 01803