Life Insurance Trusts (ILITs), Explained for Palm Beach

Many Palm Beach families carry substantial life insurance and assume it passes tax-free. The death benefit usually is income-tax-free, but it can still be counted in your estate for federal estate tax. An Irrevocable Life Insurance Trust, or ILIT, is the tool that keeps a large policy out of that calculation. Here is how it works, what it costs, and when it is worth it.

The problem an ILIT solves

Florida has no state estate or inheritance tax, which is a real advantage for residents. But the federal estate tax still applies to large estates, and if you own your life insurance policy, the full death benefit is included in your taxable estate. For a Palm Beach family with a high-value home, investments, and a seven-figure policy, that inclusion can push the estate over the federal exemption and create a tax bill. An ILIT removes the policy from your ownership so it is not counted.

How an ILIT works

You create an irrevocable trust, and the trust owns the life insurance policy instead of you. Because you no longer own or control the policy, the death benefit is generally excluded from your taxable estate. When you pass, the trust collects the proceeds and distributes them to your beneficiaries under the terms you set, free of estate tax and outside of probate.

The three-year rule and new policies

Timing matters. If you transfer an existing policy into an ILIT and die within three years, federal law pulls the death benefit back into your estate. For this reason many advisors have the ILIT purchase a new policy from the start, which avoids the three-year lookback entirely. This is one reason not to wait if an ILIT fits your plan.

Funding premiums: the Crummey step

You fund the trust by gifting money to it to pay premiums. To keep those gifts within the annual gift tax exclusion, the trust sends beneficiaries a short notice giving them a temporary right to withdraw the gift, known as a Crummey notice. It sounds technical, but in practice it is an annual letter the trustee sends. Skipping it can cost the gift tax benefit, so the trustee must stay disciplined each year.

Cost and timeline

An ILIT is a more involved document than a basic will, so it carries a higher drafting cost than a standard plan, reflecting its irrevocable nature and ongoing administration. Setup typically takes several weeks: drafting the trust, obtaining a trust tax ID, opening a trust bank account, and either transferring or applying for the policy. After that, the work is annual: gifting premium money, sending Crummey notices, and paying the premium from the trust account.

Is an ILIT right for you?

An ILIT is most valuable for Palm Beach residents whose total estate, including insurance, approaches or exceeds the federal exemption, or who want creditor protection and controlled distribution of the proceeds. If your estate is comfortably under the exemption, a simpler beneficiary designation may be all you need. The trade-off is permanence: an ILIT is irrevocable, so you give up control in exchange for the tax result.

This article is general information, not legal or tax advice. Federal exemption amounts change and the rules are complex. Consult a licensed Florida estate planning attorney before creating an ILIT.