Irrevocable Life Insurance Trust (ILIT) Attorney in Austin, TX

Irrevocable Life Insurance Trusts (ILITs) for Austin Families

Life insurance is generally income tax free to your family, but it is not estate tax free. If you own the policy when you die, the full death benefit is added to your taxable estate. An irrevocable life insurance trust (ILIT) owns the policy instead, so the proceeds pass to your family outside your estate and can provide cash to pay any estate tax that is due.

Reviewed by Turner Henington, attorney and former KPMG tax accountant, Texas Bar No. 24148206 · Updated November 2026

How an ILIT Works

• The trust buys the policy. Ideally the trustee applies for a new policy, so you never own it.
• You make gifts to pay the premiums. Beneficiaries receive a short, temporary right to withdraw each gift (a “Crummey” power, from Crummey v. Commissioner, 397 F.2d 82 (9th Cir. 1968)), so the gifts can qualify for the annual exclusion of $19,000 per beneficiary in 2026 (26 U.S.C. § 2503).
• At your death, the trustee collects the proceeds and can hold them in protected trusts for your spouse and children or use them to provide liquidity to your estate.

Existing Policies and the Three-Year Rule

You can transfer a policy you already own to an ILIT, but if you die within three years of the transfer the proceeds are included in your estate anyway (26 U.S.C. § 2035). When health allows, having the trust buy a new policy avoids that waiting period. Transfers of existing policies also need care under the income tax “transfer for value” rule (26 U.S.C. § 101).

Why Texas Couples Use ILITs

• Cash to pay estate tax. Estates built on a family business, ranch land or real estate may have a large tax bill and little cash. The trustee can buy assets from the estate or lend to it, so the family does not have to sell at the wrong time. (The trust should not be required to pay the estate’s taxes, or the proceeds can be pulled back into the estate.)
• Second-to-die policies. For married couples, estate tax is usually due at the second death, so an ILIT often owns a survivorship policy that pays when both spouses have died.
• Community property issues. A policy bought with community funds is often owned half by each spouse. If the non-insured spouse dies first, half of the policy’s value can be in their estate. An ILIT avoids the question.
• Equalizing inheritances. One child can receive the family business while insurance in the ILIT provides an equal share for the others.
• Protection for children. Proceeds held in a spendthrift trust are protected from a beneficiary’s creditors and divorce (Tex. Prop. Code § 112.035).

Do You Still Need an ILIT With a $15 Million Exemption?

For many families, no estate tax will be due, and an ILIT is not necessary for tax reasons. It still makes sense for couples whose combined estate could exceed $30 million, for estates with little cash relative to their size, and for families who want insurance proceeds held in trust for children rather than paid to them outright.

Administration Matters

ILITs fail most often because of sloppy administration. Each year the trustee should receive the premium gift, send the withdrawal notices, wait out the withdrawal period, and then pay the premium. We set up a simple annual checklist and coordinate with your insurance advisor and CPA, including gift tax returns when needed.

How We Help

We draft the ILIT, coordinate the policy application or transfer with your insurance professional, prepare the first withdrawal notices, and fit the trust into your revocable trust plan. See the estate tax planning overview for related strategies.

Why Work With Us

• Tax background. Turner Henington is a former KPMG tax accountant, so we design trusts with both the estate tax and your family’s income tax in mind.
• We work with your CPA and advisor. Marital and bypass trust decisions often happen after a death, on the estate tax return, so we coordinate with the people who prepare it.
• Flat-fee quotes. After a free consultation, you get a written flat-fee quote before any work starts.
• We also handle the first death. Funding these trusts and making the elections is part of settling the estate, and we handle both the planning and the administration.

Talk to an Estate Tax Planning Attorney

Call (512) 737-8404, book a free consultation, or send us a message below.

What Our Clients Say

Irrevocable Life Insurance Trust (ILIT) FAQ

Can I be the trustee of my own ILIT?

No. If the insured is the trustee, they generally hold incidents of ownership and the proceeds are included in their estate. A spouse, adult child, friend or professional trustee usually serves.

Can I change an ILIT later?

The trust is irrevocable, but Texas law allows some changes, for example through decanting by the trustee or a court modification, and many ILITs name a trust protector with limited powers to adjust administrative terms.

What happens if I stop paying the premiums?

The trustee’s options depend on the policy. It may lapse, be reduced to a paid-up policy, or be kept in force with cash value. We review the options with your insurance advisor before any premium is skipped.

Other Estate Tax Planning Tools

• Estate tax planning in Austin: overview
• Bypass (credit shelter) trust
• Marital trust
• QTIP trust
• Reverse QTIP election
• Spousal lifetime access trust (SLAT)
• Dynasty trust and GST planning
• Disclaimer trust
• Grantor retained annuity trust (GRAT)
• Charitable remainder and lead trusts
• Portability: keeping a deceased spouse’s unused exemption
• Lifetime gifting in Texas

This page is general information, not tax or legal advice for your situation. Reading it does not create an attorney-client relationship.