ILIT + Life Insurance Estate Tax Calculator

Estate tax with and without an ILIT

How the ILIT plan works

1. You and your spouse sign an irrevocable trust. A trustee, not you, owns a life insurance policy on your lives.
2. You gift money to the trust each year. Each child and grandchild gets a short window to withdraw their share (a Crummey power), which turns the gift into one that counts toward the annual exclusion.
3. The trustee pays the premium. At the last death, the policy pays the trust. The money sits outside your estate, so the estate tax does not take 40% of it.
4. The trust can pay the tax or lend to the estate, and what is left goes to your heirs under the trust terms.

The policy must be bought by the trust from day one. If you move an existing policy in, it stays in your estate for 3 years (IRC 2035).

The gift math

Room each year = people with withdrawal rights x the annual gift x 2 if married. In 2026 the gift is $19,000 per person, so a couple with 2 children and 3 grandchildren has 5 x $19,000 x 2 = $190,000 a year of room. Each new grandchild adds $38,000 a year for a couple. Future grandchildren add nothing until they are born.

If the premium is bigger than the room, you have two choices: buy a smaller policy that fits, or pay the overage. The overage is a gift that uses your lifetime exemption (Form 709 every year), and it still counts when the estate tax is figured. Gifts for grandchildren also need GST exemption allocated on Form 709.

When you do not need it

If your projected estate stays under the exemption at death and your state has no estate tax, an ILIT does nothing for estate tax. The calculator says so. Life insurance can still make sense for other reasons, but this page only tests the estate tax.

Fine print an attorney handles

Each beneficiary can withdraw only the greater of $5,000 or 5% of the trust a year without the lapse being treated as a gift by that person. An estate attorney drafts around this with hanging powers. An attorney also picks the trustee, the state and the terms. Hans Goldstein is an Enrolled Agent, not an attorney.

What this page does not tell you

The estate you enter is grown at one steady rate, so enter a rate net of income tax and spending. Premiums are estimates from published rate tables, not offers, and the result is a projection, not a promise.

The death benefit depends on paying the premiums and on the insurer's ability to pay; state insurance-insolvency funds cap what they cover. The 2027 exemption (about $15,460,000) is our estimate because the IRS had not published it. Generation-skipping tax, state gift tax and trust and attorney costs are not modeled.

Policies are underwritten, and a health issue can raise the price or end the offer. Hans Goldstein is also a licensed life insurance agent (CA Insurance License #4273294) and may earn a commission if you buy a policy through him; he is not licensed to sell securities and does not recommend any investment. Education only. Not tax, legal, investment or insurance advice.

Want the bigger picture?

This page tests the policy alone. The estate tax strategy calculator adds real estate sales, 1031 exchanges, installment sales and suspended losses, and shows how the policy is paid for.

Frequently asked questions