Irrevocable Life Insurance Trusts (ILITs) in Florida
26 U.S.C. §§ 2042, 2035, 2503(b), 677(a)(3); Fla. Stat. §§ 627.404, 222.13, 736.0505(2)
An irrevocable life insurance trust (ILIT) owns a policy on your life so the death benefit stays out of your taxable estate. A policy you own is included at its full death benefit. An ILIT works only if you hold no incidents of ownership, and the trust should usually buy the policy itself.
What it is
Life insurance you own is part of your taxable estate. The gross estate includes insurance proceeds payable to your executor (26 U.S.C. § 2042(1)) and proceeds payable to anyone else if, at death, you held any "incidents of ownership" in the policy, such as the right to change the beneficiary, borrow against it, or surrender it (26 U.S.C. § 2042(2)). For a family near the federal exemption ($15 million per person in 2026), a large policy can create estate tax on the very money meant to support the family.
An ILIT solves this by owning the policy. An independent trustee applies for the policy, owns it, pays the premiums, and is named as beneficiary. You hold no incidents of ownership, so the proceeds are not included under § 2042. At your death the trustee collects the proceeds and holds or distributes them under the trust's terms. The trust can authorize the trustee to buy assets from your estate or lend to it, which gives the estate cash to pay taxes and expenses.
Timing matters because of the three-year rule. If you transfer an existing policy, or give up a power over it, within three years before your death, the proceeds are included in your gross estate as if you had kept it (26 U.S.C. § 2035(a)). For that reason, the usual approach is for the trustee to apply for and own a new policy from the start, rather than transferring a policy you already own. When an existing policy must be moved, the three-year period is part of the planning.
You fund the premiums by making gifts to the trust. A gift of a future interest does not qualify for the annual gift tax exclusion (26 U.S.C. § 2503(b)(1); Treas. Reg. § 25.2503-3(a)), and a gift to a trust is ordinarily a future interest. ILITs therefore commonly give beneficiaries a temporary right to withdraw each contribution, often called a Crummey power. When the trustee notifies the beneficiaries and the withdrawal window passes unused, the contribution can qualify for the annual exclusion, which is $19,000 per beneficiary in 2026, and the trustee then pays the premium.
For income tax, an ILIT is usually a grantor trust because its income may be used to pay premiums on insurance on your life (26 U.S.C. § 677(a)(3)). Most ILITs have little taxable income while the policy is in force.
ILIT Figures and Rules for 2026
| Item | 2026 Figure | Notes |
|---|---|---|
| Annual gift tax exclusion | $19,000 per beneficiary | IRS figure for 2026; applies only to present-interest gifts (26 U.S.C. § 2503(b)). |
| Three-year rule | 3 years | A policy transferred within three years of death is included in the estate (26 U.S.C. § 2035(a)). |
| Withdrawal-right lapse safe harbor | Greater of $5,000 or 5% | A lapse above this amount is treated as a release by the beneficiary (26 U.S.C. § 2514(e)). |
| Basic exclusion amount | $15,000,000 per person | 26 U.S.C. § 2010(c)(3) for 2026. |
Dollar figures are for 2026 and are adjusted for inflation in later years.
When an ILIT Makes Sense
An ILIT is worth considering when:
- Your estate, including the death benefit of your life insurance, is near or above the federal exemption, or would be with a planned policy.
- Your estate is built around a business, professional practice, or real estate that would be hard to sell quickly to pay estate tax, which is generally due with the return nine months after death (26 U.S.C. §§ 6075(a), 6151(a)).
- You want insurance proceeds held in trust for children or grandchildren rather than paid to them outright.
- You and your spouse are considering a survivorship (second-to-die) policy to provide cash at the second death, when estate tax for a married couple is often due.
- You are buying a new policy and can have the trust apply for it from the start.
If your estate is well below the exemption, a beneficiary designation or naming your revocable living trust as beneficiary is usually simpler. The ILIT's purpose is estate tax exclusion, and that comes with irrevocability and annual administration.
Florida Rules That Apply to ILITs
Insurable interest. A Florida life insurance contract on another person's life requires an insurable interest. A trust, or its trustee, has an insurable interest in the life of the trust's grantor if the policy proceeds are primarily for the benefit of trust beneficiaries who have an insurable interest in the insured (Fla. Stat. § 627.404(2)(b)5.). The insured must also apply for or consent in writing to the policy (Fla. Stat. § 627.404(5)), and signing the application counts as that consent (Fla. Stat. § 627.404(6)).
Creditor protection of proceeds. When a Florida resident dies, life insurance proceeds go to the designated beneficiary and are exempt from the claims of the insured's creditors, unless the policy or a valid assignment provides otherwise (Fla. Stat. § 222.13(1)). If the proceeds are payable to the insured's estate, they become part of the probate estate and are administered with the other estate assets (Fla. Stat. § 222.13(1)). Naming the ILIT, not the estate, as beneficiary keeps the proceeds out of probate.
Withdrawal rights and beneficiaries' creditors. Florida treats the holder of a withdrawal power as a settlor while the power can be exercised (Fla. Stat. § 736.0505(2)(a)). After the power lapses, the holder is treated as a settlor only to the extent the lapsed amount exceeds the greater of the federal "5 and 5" amount or the annual exclusion amount, doubled if the donor was married (Fla. Stat. § 736.0505(2)(b)). Keeping withdrawal rights within those limits matters for the beneficiaries.
Grandchildren and the GST Tax
If an ILIT may benefit grandchildren, the generation-skipping transfer tax applies separately. An annual exclusion gift to a trust does not automatically receive a zero GST inclusion ratio unless the trust is for a single beneficiary and meets other conditions (26 U.S.C. § 2642(c)(2)). Most multi-beneficiary ILITs therefore need GST exemption allocated on the gift tax return. See our generation-skipping trust page.
How an ILIT Is Set Up and Run
Most ILIT problems come from administration, not drafting. The steps below are repeated every year the policy is in force.
- Step 1: Determine how much insurance is needed by projecting the estate tax and the liquidity gap.
- Step 2: Sign the trust and name an independent trustee before the policy is issued.
- Step 3: The trustee applies for the policy, with the trust as owner and beneficiary, and you sign the application as the insured.
- Step 4: Each year, make a gift to the trust before the premium is due. Do not pay the insurer directly.
- Step 5: The trustee sends withdrawal-right notices to the beneficiaries and waits for the withdrawal period to pass.
- Step 6: The trustee pays the premium from the trust account and keeps records of the gift, the notices, and the payment.
- Step 7: File a gift tax return when required, including any GST exemption allocation.
- Step 8: At death, the trustee collects the proceeds and administers the trust. See our trustee responsibilities page.
Why work with an attorney
An ILIT does not work if the details are wrong. A policy the insured still controls is included under 26 U.S.C. § 2042, an existing policy transferred too late is included under § 2035, and contributions without properly administered withdrawal rights may not qualify for the annual exclusion. Florida's insurable interest statute and creditor rules also shape how the trust is drafted. Yergey & Yergey, P.A. has practiced estate and trust law in Orlando since 1928, and David A. Yergey III holds an LL.M. in Taxation from the University of Alabama School of Law. We draft ILITs as part of a coordinated estate tax plan and work with your insurance advisor on ownership and beneficiary designations.
Frequently Asked Questions
What is an irrevocable life insurance trust in Florida?
An irrevocable life insurance trust (ILIT) is a trust that owns life insurance on your life and receives the death benefit. Because you do not own the policy or hold incidents of ownership, the proceeds are not included in your gross estate under 26 U.S.C. § 2042. Florida law gives the trust an insurable interest in your life when the proceeds are primarily for beneficiaries with an insurable interest (Fla. Stat. § 627.404(2)(b)5.).
Can I transfer my existing life insurance policy to an ILIT?
Yes, but if you die within three years after the transfer, the proceeds are included in your gross estate as if you still owned the policy (26 U.S.C. § 2035(a)). The transfer is also a gift, valued under the gift tax rules. Where possible, the trustee applies for a new policy owned by the trust from the start, which avoids the three-year rule for that policy.
What is a Crummey letter for an ILIT?
A Crummey letter is a notice from the trustee telling a beneficiary that a contribution has been made and that the beneficiary has a temporary right to withdraw it. The withdrawal right makes the gift a present interest, so it can qualify for the annual gift tax exclusion under 26 U.S.C. § 2503(b), which is $19,000 per beneficiary in 2026. If the right is not exercised, the trustee uses the money to pay the premium.
Are life insurance proceeds protected from creditors in Florida?
Generally, yes, from the insured's creditors. When a Florida resident dies, life insurance proceeds go to the named beneficiary and are exempt from the insured's creditors unless the policy or a valid assignment provides otherwise (Fla. Stat. § 222.13(1)). If the policy is payable to the insured's estate, the proceeds become probate assets. Naming an ILIT as beneficiary keeps the proceeds out of probate.
Who should be the trustee of an ILIT?
Usually someone other than the insured, such as an adult child, another family member, a trusted adviser, or a corporate trustee. If the insured serves as trustee with powers over the policy, those powers can be incidents of ownership that pull the proceeds back into the estate under 26 U.S.C. § 2042(2). The trustee must be willing to handle annual gifts, notices, premium payments, and records.
Do I need an ILIT if my estate is under the federal exemption?
Often not. With a $15 million per-person basic exclusion amount in 2026 (26 U.S.C. § 2010(c)(3)), many families owe no federal estate tax even with insurance included. An ILIT can still serve non-tax goals, such as holding proceeds in trust for young beneficiaries, but a simpler beneficiary designation may do the same job. The decision should be based on a projection of the full estate, including the death benefit.
The information on this page is for general informational purposes and does not constitute legal advice or create an attorney-client relationship. Florida law changes. Consult a licensed Florida attorney for guidance specific to your matter.
Reviewing your life insurance?
Ownership and beneficiary designations decide whether a policy is taxed in your estate. Call (407) 843-0430 or schedule a consultation with our Orlando estate planning attorneys to review your coverage and whether an ILIT fits your plan.
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