Is life insurance part of an estate?

For the estate tax, yes, if you own the policy or it is payable to your estate. The death benefit is counted even when it is paid straight to your children and never passes through your will. A policy owned by a trust, with no powers kept by you, is generally not counted.

Is life insurance taxable in Illinois?

A death benefit is generally not income to the person who receives it. The Illinois estate tax is a separate question. Illinois starts from the federal count of your estate, which includes a policy you own, and taxes estates over $4,000,000. In this page's example, a $1,500,000 policy adds $285,714 of Illinois estate tax.

Is life insurance tax deductible?

No. The IRS says you cannot deduct the premiums you pay on your own life insurance. The tax reason people use an irrevocable life insurance trust is different. It is the estate tax on the death benefit, not an income tax deduction for the premiums.

Taxes

What is an irrevocable life insurance trust (ILIT)?

A life insurance policy you own is counted in your estate, and in Illinois that can be what puts a family over the $4,000,000 line. An irrevocable life insurance trust owns the policy in your place. It works only if you are willing to give up control of the policy for good.

By Joshua Mangoubi, CFA, MBAPublished November 20266 min read

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The short answer

An irrevocable life insurance trust, or ILIT, is a trust that owns a life insurance policy on your life, so the death benefit is generally not counted in your estate for the estate tax. It tends to fit when your estate, with the policy added in, is over the Illinois line of $4,000,000. You cannot change the trust or take the policy back, and a policy you already own has a three-year wait.

On this page

You bought life insurance so that your husband or wife, or your children, would have money when you die. The death benefit is generally not income to them, and many people assume no tax touches it.¹ The estate tax can. If you own the policy, the whole death benefit is counted in your estate, and Illinois taxes estates over $4,000,000.²³

An irrevocable life insurance trust, or ILIT, is a trust that owns a policy on your life in your place. Because the trust owns the policy and you do not, the death benefit is generally not counted in your estate. The cost is control. You cannot change the trust or take the policy back. This page explains how the trust works, what you give up, and who it tends to fit. The statute and the arithmetic are in the detailed version below.

What is an irrevocable life insurance trust (ILIT)?

An irrevocable life insurance trust is a trust that owns a life insurance policy on your life and is named as its beneficiary. An estate attorney writes it for you. A trustee you choose, who is not you, runs it. When you die, the insurer pays the trust, and the trustee follows the instructions you wrote. Those instructions can be simple, such as paying your children in equal shares, or they can support your spouse first.

Irrevocable means you cannot cancel the trust, change its terms, or take the policy back after it is set up. That is what keeps the policy out of your estate. The tax law counts a policy in your estate if you held any power over it when you died. The regulations list the powers: to change the beneficiary, to cancel the policy, to assign it, or to borrow against it.⁴

Is life insurance part of your estate?

It depends on who owns the policy, not on who receives the money.

It depends on who owns the policy, not on who receives the money.

If you own a policy on your own life, the death benefit is part of your estate for the estate tax. That is true even when the insurer pays your children directly and the money never passes through your will. A policy that is payable to your estate is counted too.²

This is separate from income tax. The people who receive a death benefit generally do not report it as income.¹

Illinois starts from the same count. The Illinois estate tax return begins with the taxable estate from the federal return, so a policy that is counted there is counted for Illinois.³ The federal estate tax starts at $15,000,000 per person in 2026. Illinois starts at $4,000,000.³⁵ A house, retirement accounts and a policy can cross the Illinois line together when none of them would cross it alone. Our Illinois estate tax guide explains who owes the tax.

How much Illinois estate tax can a life insurance policy add?

Here is a hypothetical example. Suppose you are widowed. You own a house, savings and retirement accounts worth $3,500,000, and a life insurance policy that will pay your children $1,500,000.

The same policy, owned two ways

You

Estate that is counted: $5,000,000
Illinois estate tax: $285,714

An irrevocable life insurance trust

Estate that is counted: $3,500,000
Illinois estate tax: $0

A hypothetical Illinois resident who is not married at death, with $3,500,000 of other property and a $1,500,000 life insurance policy. Illinois estate tax under 2026 law. No federal estate tax is due in either case. Source: note 6.

In the example, if you own the policy, your estate is $5,000,000 and the Illinois estate tax is $285,714. If a trust owns the policy, your estate is $3,500,000. That is under the Illinois line, and no Illinois estate tax is due. The insurer pays the same $1,500,000 either way. The difference is the tax that comes out of the rest of what you leave them.⁶

Our Illinois estate tax calculator shows the tax on your own total, with the policy counted and without it.

What if you are married?

If everything you own passes to your spouse, generally no estate tax is due at your death, whoever owns the policy.⁷ The death benefit then becomes part of what your spouse owns, and it is counted in your spouse's estate later. Illinois does not let a surviving spouse use the $4,000,000 the first spouse left unused.³

So for a married couple, the policy usually matters at the second death. That is when the house, the accounts and the insurance money are added up in one estate. A trust that owns the policy can keep the death benefit out of both of your estates and still support your spouse. Whether it does depends on how the trust is written, which is your attorney's work. What is a QTIP trust? covers another trust that married couples in Illinois use.

How does an irrevocable life insurance trust work?

An estate attorney writes the trust. You name the trustee and the people the trust is for. Then the trust gets a policy in one of two ways.

The trust buys a new policy. The trustee applies for the policy on your life, and the trust owns it from the first day. You never own it.

You transfer a policy you already own. This works, with a wait. If you die within three years of the transfer, the death benefit is counted in your estate as if you had kept the policy.⁸ After three years that rule no longer applies, as long as you kept no powers over the policy.

Either way, you pay for the policy by giving money to the trust. The trustee uses it to pay the insurer.

How are the premiums paid, and is there gift tax?

Each premium you fund is a gift to the people the trust is for. In 2026, up to $19,000 a year to each person is excluded from your taxable gifts. The exclusion applies only to a gift the person has a right to use now.⁹

A gift to a trust that pays out only after you die does not meet that test.¹⁰ For that reason, many of these trusts give each beneficiary a short period to withdraw their share of each gift, and the trustee sends each of them a written notice every time you add money. The notices are often called Crummey letters, after the court case that allowed the approach.¹⁰ The beneficiaries normally leave the money in the trust so the trustee can pay the premium.

If a gift does not qualify for the exclusion, you have to report it on a gift tax return, even when it is under $19,000.⁹

The IRS does not let you deduct the premiums you pay on your own life insurance.¹¹

What do you give up with an irrevocable life insurance trust?

Control of the policy. You cannot change the beneficiaries, cancel the policy, borrow against its cash value, or take it back. Keeping any of those powers would put the policy back in your estate. For the same reason, these trusts usually name someone other than you as trustee.⁴

The chance to change your mind. Your family can change after you sign. A child marries or divorces, a grandchild is born, or you would now divide things differently. The trustee follows the trust as it was written. Ask your attorney, before you sign, how much room the trust gives the trustee to adjust.

Simplicity. The trust needs its own bank account. Someone has to receive your gifts, send the notices, pay the premiums and keep records every year for as long as the policy lasts. After your death the trustee manages and pays out the money. An attorney charges to draft the trust, and a professional trustee charges to run it.

The policy itself, if the gifts stop. If you stop funding the premiums, the policy can lapse, and the trust is left with nothing.

Who does an irrevocable life insurance trust fit?

An irrevocable life insurance trust tends to fit when three things are true. Your estate, counted with the death benefit, is over $4,000,000 in Illinois. You expect to keep the policy for the rest of your life. And you are willing to give up control of it.

It can also help for a reason that is not about the size of the tax. If most of what you own is a business, farmland or a house, the money in the trust can give your family cash when an estate tax is due, so they are less likely to have to sell in a hurry. Our essay on planning for the Illinois estate tax covers the other tools.

You probably do not need one if everything you own, with the death benefit added in, is comfortably under $4,000,000. The policy then causes no Illinois estate tax, and a trust would add cost and paperwork with no tax benefit. The same is often true of term insurance you plan to drop when the mortgage is paid or the children are grown. If your question is how much coverage your family would need, that is what our life insurance calculator is for.

What goes wrong with life insurance and the estate tax?

These are the mistakes we see most often.

People add up the house and the accounts and leave the life insurance off the list, so they do not know they are over $4,000,000.

People name their children as beneficiaries and believe that keeps the policy out of the estate. It does not, if they still own the policy.

People move an existing policy into a trust late, and die within three years.

The trust is set up correctly, and then the yearly notices to the beneficiaries stop being sent.

People pay the premium to the insurer themselves, when the money should go to the trust and the trustee should pay it.

People name themselves trustee, or keep the right to change the beneficiaries.

People set up a trust for a policy they later drop, or for an estate that was never near the line.

Where we fit in. We integrate tax considerations into your investment strategy and collaborate with estate attorneys and CPAs to ensure your plan is coordinated. We are not a law firm or accounting firm, so we do not provide legal or tax advice. Everything in this material is for educational purposes, based on primary sources. Before taking any action, please consult the appropriate professionals to apply these ideas to your situation.

You bought the policy for the people you will leave behind. Whether a trust should own it depends on what else you own and on how much control you are willing to give up. If you would like to count your estate with the policy in it and talk through what that total means, we are glad to have that conversation.

The detailed version

The statute and the arithmeticFor estate attorneys, CPAs, and anyone who wants the rules: inclusion of life insurance in the gross estate, incidents of ownership, the three-year rule, the annual exclusion for gifts in trust, and the Illinois figures in the example.Show

Inclusion in the gross estate

Under 26 U.S.C. § 2042 the gross estate includes insurance on the decedent's life in two cases: proceeds receivable by the executor, and proceeds receivable by other beneficiaries under policies "with respect to which the decedent possessed at his death any of the incidents of ownership, exercisable either alone or in conjunction with any other person."²

Incidents of ownership

Incidents of ownership under 26 CFR § 20.2042-1(c)

(c)(2), meaning: "the term has reference to the right of the insured or his estate to the economic benefits of the policy"
(c)(2), examples: "the power to change the beneficiary, to surrender or cancel the policy, to assign the policy, to revoke an assignment"
(c)(2), examples, continued: "to pledge the policy for a loan, or to obtain from the insurer a loan against the surrender value of the policy"
(c)(4), policies held in trust: "has the power (as trustee or otherwise) to change the beneficial ownership in the policy or its proceeds, or the time or manner of enjoyment thereof"

Regulation text as archived. Holding any one of these powers at death brings the proceeds into the gross estate. Source: note 4.

Paragraph (c)(4) is why the insured does not serve as trustee and keeps no power, alone or with anyone else, over who benefits or when.⁴

The three-year rule

26 U.S.C. § 2035(a) includes in the gross estate property the decedent transferred "during the 3-year period ending on the date of the decedent's death" if its value "would have been included in the decedent's gross estate under section 2036, 2037, 2038, or 2042" had the decedent kept it. A policy transferred to a trust within three years of death is therefore included. The regulation under § 2042 gives the contrasting case of a decedent who "4 years before his death, irrevocably assigned his entire interest in the policy," whose proceeds are not includible under that section. A policy the trust applies for and owns from issue is not a transfer by the insured of an interest in the policy.⁸

The income tax on the proceeds

Under 26 U.S.C. § 101(a)(1), gross income does not include amounts received under a life insurance contract "if such amounts are paid by reason of the death of the insured." The exceptions in that section, including a policy transferred for value, are not covered here. Interest paid on proceeds is taxable.¹

The annual exclusion and gifts in trust

26 U.S.C. § 2503(b) excludes the first $10,000 of gifts to each person in a year, indexed for inflation, for gifts "other than gifts of future interests in property." For 2026 the indexed amount is $19,000.⁹ Under 26 CFR § 25.2503-3(b), a present interest is "An unrestricted right to the immediate use, possession, or enjoyment of property or the income from property." Example (2) of that section is an insurance trust with no withdrawal right: the transfer "represents a gift of a future interest in property against which no exclusion is allowable."¹⁰

The Form 709 instructions treat each trust beneficiary who has a present interest as a separate donee, and they require a return for a gift of a future interest of any size.⁹ A right to withdraw each contribution for a limited time is the drafting practice that follows from Crummey v. Commissioner, 397 F.2d 82 (9th Cir. 1968), https://www.courtlistener.com/opinion/280774/d-clifford-crummey-v-commissioner-of-internal-revenue/. The trust in that case let each child demand a share of each year's gift, and the court held: "The petitioners should be allowed all of the exclusions claimed for the two year period." The effect of a lapsed withdrawal right on the beneficiary, and the generation-skipping transfer tax, are not covered here.

The Illinois figures

Illinois estate tax with the policy counted and not counted

$3,500,000 and a $1,500,000 policy

Tax with the policy counted: $285,714
Tax without it: $0
Difference: $285,714

$6,000,000 and a $2,000,000 policy

Tax with the policy counted: $680,634
Tax without it: $456,071
Difference: $224,563

Hypothetical. An Illinois resident who is not married at death, all property with an Illinois situs, no deductions, no adjusted taxable gifts, 2026 law. Computed with the Attorney General's published method. An illustration, not any estate's return. Source: note 6.

In the first row the estate of $5,000,000 is in the range where the Attorney General's computation is limited to 40% of the amount over the exclusion after the Illinois tax itself is subtracted: T = 0.40 × ($5,000,000 − T − $4,000,000), so T = $400,000 ÷ 1.4 = $285,714. In the second row both estates are past that range and the tax comes from the credit table. Neither estate owes federal estate tax, because both are under the $15,000,000 basic exclusion amount for 2026.⁵⁶

The Illinois return starts from the federal figure: Schedule A, line 1 of Form 700 is the "Tentative Taxable Estate from Federal Return (Line 3a, Form 706)."³

Not covered here

Policies that insure two lives and pay at the second death. Policies owned by a business or provided by an employer. Split-dollar arrangements. The transfer-for-value rule. Community property. The generation-skipping transfer tax. The income taxation of the trust. State law on a trustee's duties, and how a particular trust should be drafted.

Sources & notes (11)

Expand

1."Generally, life insurance proceeds you receive as a beneficiary due to the death of the insured person, aren't includable in gross income and you don't have to report them." "However, any interest you receive is taxable and you should report it as interest received." IRS, "Life insurance & disability insurance proceeds," https://www.irs.gov/faqs/interest-dividends-other-types-of-income/life-insurance-disability-insurance-proceeds. The statute: "gross income does not include amounts received (whether in a single sum or otherwise) under a life insurance contract, if such amounts are paid by reason of the death of the insured." 26 U.S.C. § 101(a)(1), https://www.law.cornell.edu/uscode/text/26/101. ↩
2.The gross estate includes insurance on the decedent's life "To the extent of the amount receivable by the executor as insurance under policies on the life of the decedent," and "To the extent of the amount receivable by all other beneficiaries as insurance under policies on the life of the decedent with respect to which the decedent possessed at his death any of the incidents of ownership, exercisable either alone or in conjunction with any other person." 26 U.S.C. § 2042, https://www.law.cornell.edu/uscode/text/26/2042. ↩
3."The exclusion amount for Illinois Estate Tax purposes is $4,000,000." "The portability and carry-over of the unused federal exemption to the surviving spouse is inapplicable to the computation and assessment of the Illinois Estate Tax." Illinois Attorney General, "Important Notice Regarding Illinois Estate Tax and Fact Sheet," https://illinoisattorneygeneral.gov/Page-Attachments/EstateTaxInstructionFactSheet.pdf. The Illinois return begins with the federal figure: Schedule A, line 1 is "Tentative Taxable Estate from Federal Return (Line 3a, Form 706)". Illinois Form 700, https://illinoisattorneygeneral.gov/Page-Attachments/Form700.pdf. ↩
4."Generally speaking, the term has reference to the right of the insured or his estate to the economic benefits of the policy. Thus, 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 from the insurer a loan against the surrender value of the policy, etc." For a policy held in trust, the decedent has an incident of ownership if the decedent "has the power (as trustee or otherwise) to change the beneficial ownership in the policy or its proceeds, or the time or manner of enjoyment thereof, even though the decedent has no beneficial interest in the trust." 26 CFR § 20.2042-1(c)(2) and (c)(4), https://www.law.cornell.edu/cfr/text/26/20.2042-1. ↩
5."Estates of decedents who die during 2026 have a basic exclusion amount of $15,000,000, up from a total of $13,990,000 for estates of decedents who died in 2025." IRS, "IRS releases tax inflation adjustments for tax year 2026," https://www.irs.gov/newsroom/irs-releases-tax-inflation-adjustments-for-tax-year-2026-including-amendments-from-the-one-big-beautiful-bill. ↩
6.Illinois figures computed with the engine behind our Illinois estate tax calculator, /tools/illinois-estate-tax-calculator, which reproduces the Illinois Attorney General's published estate tax calculator (computation file CalcHtm.js, https://illinoisattorneygeneral.gov/application/estate-tax-calculator/CalcHtm.js). Inputs assume an Illinois resident who is not married at death, property with an Illinois situs only, and no deductions, elections, or adjusted taxable gifts; actual estates differ, and the real inputs are reported on Form 706 and Form 700. These are hypothetical examples for illustrative purposes only; they are not advice, and they do not predict any particular estate's liability. ↩
7.The marital deduction is allowed for "the value of any interest in property which passes or has passed from the decedent to his surviving spouse, but only to the extent that such interest is included in determining the value of the gross estate." 26 U.S.C. § 2056(a), https://www.law.cornell.edu/uscode/text/26/2056. ↩
8.The gross estate includes property if "the decedent made a transfer (by trust or otherwise) of an interest in any property, or relinquished a power with respect to any property, during the 3-year period ending on the date of the decedent's death, and" "the value of such property (or an interest therein) would have been included in the decedent's gross estate under section 2036, 2037, 2038, or 2042 if such transferred interest or relinquished power had been retained by the decedent on the date of his death." 26 U.S.C. § 2035(a), https://www.law.cornell.edu/uscode/text/26/2035. "Thus, if the decedent owned a policy of insurance on his life and, 4 years before his death, irrevocably assigned his entire interest in the policy to his wife retaining no reversionary interest therein (see subparagraph (3) of this paragraph), the proceeds of the policy would not be includible in his gross estate under section 2042." 26 CFR § 20.2042-1(c)(1), https://www.law.cornell.edu/cfr/text/26/20.2042-1. ↩
9."For tax year 2026, the annual exclusion for gifts remains at $19,000." IRS, "IRS releases tax inflation adjustments for tax year 2026" (note 5). The exclusion applies to "gifts (other than gifts of future interests in property) made to any person by the donor during the calendar year." 26 U.S.C. § 2503(b)(1), https://www.law.cornell.edu/uscode/text/26/2503. "For a gift in trust, each beneficiary having a present interest in such gift is treated as a separate donee for purposes of the annual exclusion." "Certain gifts, called future interests, are not subject to the $19,000 annual exclusion and you must file Form 709 even if the gift was under $19,000." IRS, Instructions for Form 709, https://www.irs.gov/instructions/i709. ↩
10."An unrestricted right to the immediate use, possession, or enjoyment of property or the income from property (such as a life estate or term certain) is a present interest in property." "C transfers certain insurance policies on his own life to a trust created for the benefit of D. Upon C's death the proceeds of the policies are to be invested and the net income therefrom paid to D during his lifetime. Since the income payments to D will not begin until after C's death the transfer in trust represents a gift of a future interest in property against which no exclusion is allowable." 26 CFR § 25.2503-3(b) and Example (2), https://www.law.cornell.edu/cfr/text/26/25.2503-3. The withdrawal-right approach comes from Crummey v. Commissioner, 397 F.2d 82 (9th Cir. 1968). ↩
11."You can't deduct premiums you pay on your life insurance." IRS Publication 529, Miscellaneous Deductions, https://www.irs.gov/publications/p529. ↩

Questions people ask

What is an irrevocable life insurance trust?: An irrevocable life insurance trust, or ILIT, is a trust that owns a life insurance policy on your life and is named as its beneficiary. A trustee other than you runs it. Because you do not own the policy, the death benefit is generally not counted in your estate. You cannot change the trust or take the policy back.
Is life insurance part of an estate?: For the estate tax, yes, if you own the policy or it is payable to your estate. The death benefit is counted even when it is paid straight to your children and never passes through your will. A policy owned by a trust, with no powers kept by you, is generally not counted.
Is life insurance taxable in Illinois?: A death benefit is generally not income to the person who receives it. The Illinois estate tax is a separate question. Illinois starts from the federal count of your estate, which includes a policy you own, and taxes estates over $4,000,000. In this page's example, a $1,500,000 policy adds $285,714 of Illinois estate tax.
What is the three-year rule for an ILIT?: If you transfer a policy you already own into the trust and die within three years, the death benefit is counted in your estate as if you had kept the policy. The rule does not apply to a policy the trust buys and owns from the first day, because you never owned it.
Is life insurance tax deductible?: No. The IRS says you cannot deduct the premiums you pay on your own life insurance. The tax reason people use an irrevocable life insurance trust is different. It is the estate tax on the death benefit, not an income tax deduction for the premiums.

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What is an irrevocable life insurance trust (ILIT)?

What is an irrevocable life insurance trust (ILIT)?

Is life insurance part of your estate?

How much Illinois estate tax can a life insurance policy add?

What if you are married?

How does an irrevocable life insurance trust work?

How are the premiums paid, and is there gift tax?

What do you give up with an irrevocable life insurance trust?

Who does an irrevocable life insurance trust fit?

What goes wrong with life insurance and the estate tax?

Inclusion in the gross estate

Incidents of ownership

The three-year rule

The income tax on the proceeds

The annual exclusion and gifts in trust

The Illinois figures

Not covered here

Questions and answers

Related pieces

The four-million-dollar line.

What is a QTIP trust?

How the Illinois estate tax is calculated.