Insurance Trust (ILIT)

In the United States, an insurance trust, formally an irrevocable life insurance trust or ILIT, is a trust created to own a life insurance policy on the person who establishes it (the grantor). Because the trust, not the grantor, owns the policy, the death benefit falls outside the grantor's taxable estate, provided the grantor keeps no rights over the policy (and, for an existing policy moved into the trust, survives three years after the transfer). When the insured dies, the proceeds pass to the trust's beneficiaries free of US federal estate tax and can be used exactly when cash is scarcest: to pay estate taxes, settle debts, or equalise inheritances without forcing the sale of a business or property.

Why it matters for family offices

ILITs are a standard building block in US estate plans for ultra-high-net-worth families, particularly where wealth is concentrated in illiquid holdings such as an operating company or real estate. US federal estate tax is generally due within nine months of death, and an estate rich in assets but poor in cash may otherwise have to sell holdings quickly and on poor terms. An ILIT converts that risk into a funded plan: insurance proceeds arrive inside the trust, outside the estate, and the trustee can lend to the estate or buy assets from it to supply liquidity. The trade-off is permanence and administration. The trust is irrevocable, the grantor gives up control of the policy, and the arrangement only works if it is run properly year after year.

How it shows up in practice

The running of an ILIT is where family offices earn their keep. Premiums are typically funded by annual gifts from the grantor to the trust, and for those gifts to qualify for the US annual gift tax exclusion, beneficiaries usually receive Crummey notices, letters giving them a short window to withdraw the gifted amount. Each year the office must move the gift, issue the notices, keep evidence they were sent, and pay the premium on time, across what may be several policies and trusts. Consider a family whose wealth sits mainly in a manufacturing company: the ILIT holds a policy sized against the expected estate tax bill, and when the founder dies the proceeds let the estate pay tax while the company passes intact to the next generation. None of that works if a premium lapses or a notice is missed, which is why offices track these obligations as carefully as any investment deadline.