Irrevocable Life Insurance Trust at a $15M Exemption: IRS Data

What an ILIT does, in the words of the Code

An ILIT is not a tax shelter with its own section of the Code. It is a trust arranged so that four ordinary rules line up. Here is each rule and where it comes from.

Two points the table makes visible. First, the whole structure rests on a negative: the insured must hold nothing. Second, the regulation’s example about a policy assigned “4 years before his death” and the statute’s 3-year line are not the same sentence: section 2035(a) is the reason the safe period is measured from the date of the assignment, and a newly issued policy bought by the trustee is a different fact pattern that the Code text does not address directly (our reading). That is a question for the estate-planning attorney who drafts the trust.

What changed on January 1, 2026

Section 70106 of Public Law 119-21 struck “$5,000,000” in 26 U.S.C. 2010(c)(3) and inserted “$15,000,000”, and applies to “estates of decedents dying and gifts made after December 31, 2025”. Rev. Proc. 2025-32 confirms $15,000,000 for 2026 and says the amount “will be adjusted for inflation for calendar year 2027 and future years.” The full story, portability and the state table are on our estate tax exemption 2026 page. For an ILIT the practical change is the line below which a death benefit costs nothing at the federal level:

• Before: the doubled exemption in section 2010(c)(3)(C) ran only for decedents dying and gifts made after December 31, 2017 and before January 1, 2026. Public Law 119-21 struck that subparagraph, so there is no scheduled drop.
• Now: a single person with a $12,000,000 estate and a $5,000,000 policy has a $17,000,000 gross estate. A federal tax of $800,000 is on the table only because the policy is counted (our arithmetic, below).
• Unchanged: the 40% rate above the exemption, the 9-month return and payment date (26 U.S.C. 6075(a)), and the need for a trust that holds the policy outright.

IRS data: how much insurance is still in the estates that file

The IRS Statistics of Income (SOI) Division tabulates every federal estate tax return by the year it is filed. Returns filed in 2024 are mostly for 2023 deaths, when the filing threshold was $12.92 million (SOI footnote 1). The table splits them by whether any federal tax was owed and by size of gross estate. Insurance is the column SOI calls “Net life insurance”.

Net life insurance as a share of gross estate, returns filed in 2024 (IRS SOI Table 1; shares our arithmetic):

Three readings:

• It is small. Across all 7,195 returns, net life insurance was $2,176,371 thousand against a gross estate of $248,944,039 thousand, 0.87%; 2,452 returns (34.1%) reported any. On taxable returns it was 0.56%, on nontaxable returns 1.21%.
• It is higher where no federal tax was owed. In the $10 million to $20 million band insurance was 1.80% of the gross estate on nontaxable returns and 0.84% on taxable ones. Some of that is the marital deduction, which can absorb insurance left to a surviving spouse (our reading); the table does not say.
• It cannot show who has an ILIT. A policy held by an ILIT is, by design, not in the gross estate, so it does not appear in this column. The Form 706 instructions require the opposite on Schedule D: “You must list every insurance policy on the life of the decedent, whether or not it is included in the gross estate.” The SOI table does not publish that count. What it does show is the insurance that stayed in. At the 40% rate, the $720 million inside taxable estates would be at most about $288 million, or 1.2% of the $23.31 billion collected, before any deduction (our arithmetic; an upper bound).

The liquidity gap in the IRS data

The reason a family uses insurance for estate tax is timing: the tax is due 9 months after death (26 U.S.C. 6075(a)) and an estate heavy in real estate or private funds cannot sell on that clock without a discount. SOI lets us measure the size of the tax against what the same estates held in cash and publicly traded stock.

Taxable returns filed in 2024: tax against liquid assets, per return (IRS SOI Table 1; all ratios our arithmetic; money per return = SOI amount divided by returns):

“Illiquid private holdings” here is our grouping of SOI columns: other real estate, real estate partnerships, closely held stock, private equity and hedge funds, other limited partnerships, other noncorporate business assets and farm assets. It excludes the personal residence and retirement accounts.

What the taxable estates were made of (share of gross estate; IRS SOI Table 1; shares our arithmetic):

What the tables show, and what they do not:

• On average the tax is a large bite of the liquid assets, not more than all of them. Net federal tax was 28.5% of cash plus listed stock in the $10 million to $20 million band, 46.7% from $20 million to $50 million and 47.6% at $50 million or more. Add the state death tax that taxable estates deducted ($976,725 per taxable return on average) and the all-taxable-returns figure goes from 45.2% to 50.2% (our arithmetic).
• The averages hide the estates that matter here. SOI publishes totals for each row, not individual returns, so it cannot say how many estates owed more tax than they held in cash and listed stock. An estate with 30% in listed assets and 70% in a building and a private fund is in a different position from the average, and the table cannot count it.
• Real estate is a fifth to a quarter of the middle bands. Residence, other real estate and partnerships were 24.2% of the gross estate of taxable returns in the $10 million to $20 million band and 20.1% in the $20 million to $50 million band, against 10.2% at $50 million or more, where closely held stock (14.2%) is the larger block. Our estate tax exemption page gives the all-returns shares by band.
• Concentration. The 1,444 taxable returns with gross estates of $20 million or more were 54.2% of the 2,663 taxable returns and paid $21.46 billion of the $23.31 billion, or 92.1%. Those are the estates the $15,000,000 exemption leaves most exposed.

Who still has the problem an ILIT solves

Using only the documents above, the cases where counting a death benefit changes a tax bill are these. This is not a recommendation to buy or place anything.

1. A single person above $15,000,000, or a couple above $30,000,000. The $30,000,000 requires the first spouse’s executor to elect portability on a timely Form 706 (26 U.S.C. 2010(c)(5)(A)); see our estate tax exemption page. In the SOI data, 1,444 of the 2,663 taxable returns filed in 2024 were for gross estates of $20 million or more.
2. A resident of one of the 12 states or DC that tax estates. Twelve of the thirteen thresholds are far below $15,000,000 (table below); Connecticut’s equals it. Death benefit counted in a state taxable estate can cost state tax when federal tax is zero. Washington, for example, defines gross estate as “gross estate” “as defined and used in section 2031 of the internal revenue code”, which includes proceeds counted under section 2042 (our reading).
3. An estate whose assets are mostly illiquid. If a building, a family LLC, DST interests or non-traded fund shares are most of the estate, the tax is due 9 months after death in cash. Our repurchase-rules study of 35 non-traded funds shows why heirs cannot count on a fund to buy back shares on that schedule. Section 6166 lets an executor pay in up to 10 installments if the value of an interest in a closely held business exceeds 35 percent of the adjusted gross estate; whether rental real estate or a fund interest qualifies is a legal question, not a number we can give.
4. Who likely does not. An estate that sits under $15,000,000 (single), is in a state with no estate tax, and is mostly listed securities and cash has no federal or state estate tax for a death benefit to add to. Section 101(a)(1) already makes the proceeds free of income tax, with or without a trust. The IRS table shows 4,532 of 7,195 filers paid no federal tax even at the $12.92 million threshold, 63.0% (our arithmetic).

The 13 jurisdictions that tax estates at or below the federal line

Thresholds for 2026 deaths, from each state’s statute or revenue department as saved on October 12, 2026 and re-read against the saved text on October 20, 2026. Several are indexed and will change in 2027. Our fuller state table, with the five inheritance-tax states, is on the estate tax exemption page.

The threshold means different things by state: Illinois’s Attorney General says the exclusion “is a taxable threshold and not a credit against tax”, and New York’s Tax Law 952(c) says that “no credit shall be allowed to the estate of any decedent whose New York taxable estate exceeds one hundred five percent of the basic exclusion amount.” That is why a death benefit that adds $2,000,000 to a New York estate can be expensive in the example below.

Worked examples (our arithmetic)

All examples are a single person dying in 2026, no lifetime taxable gifts, no deductions other than where stated, tax at the 40% rate on the amount above $15,000,000 (26 U.S.C. 2001(c)). They are illustrations of the arithmetic, not a forecast for any family.

Reading the cases together: in Case A the federal tax exists only because the policy is counted; in Case B it is a flat 40 cents on the dollar for the whole benefit; in Case C the 3-year rule removes the whole saving; in Case D the state tax appears at a size where the federal tax is zero. In Case F the premium is a gift. If it is more than the annual exclusion, it is reported on Form 709 and reduces the exemption, which is the reason the premium schedule is sized to the exclusion (our reading). The treatment of gifts of other assets is in our annual gift tax exclusion page and in the Form 709 guide for illiquid interests.

Where an ILIT breaks

Each of these is stated in a source above; whether it applies to a given trust is for the lawyer who drafts and the CPA who files.

• The insured holds a power. Section 2042(2) counts incidents of ownership “exercisable either alone or in conjunction with any other person”. Regulation 20.2042-1(c)(4) applies it to a trustee-insured. A reversionary interest worth more than 5 percent of the policy also counts.
• The 3-year rule. Section 2035(a) adds back an interest transferred or a power relinquished within 3 years of death. Section 2035(d) excepts a bona fide sale for an adequate and full consideration. Section 2035(b) also adds back any gift tax paid on gifts in the 3 years before death.
• No present interest. The exclusion is for gifts “other than gifts of future interests” (section 2503(b)(1)). Regulation 25.2503-3 Example (2): policies transferred by a person to a trust with income to a beneficiary only after the insured’s death are a future interest, and no exclusion is allowable.
• The 5-and-5 lapse. Sections 2514(e) and 2041(b)(2): the greater of $5,000 or 5 percent. Case G above.
• Transfer for value. Section 101(a)(2) limits the income tax exclusion on a sale of a policy; a gift to the insured’s trust is on the carryover-basis side of the exception, a sale is not.
• The trust must be irrevocable. A revocable trust leaves the policy in the estate under section 2038(a)(1) (power to “alter, amend, revoke, or terminate”). Our revocable versus irrevocable trust guide covers the other differences.

The 590-a-month neighbor: the spousal lifetime access trust (SLAT)

A SLAT is not a life insurance trust, though an ILIT is sometimes drafted as one. In a SLAT, one spouse makes a gift of assets to a trust for the other spouse and the descendants. The Code explains the trade-offs:

• It is a gift, not a transfer to the spouse. Section 2523(b)(1) denies the marital deduction for a terminable interest where the donor transfers an interest in the same property to someone else, so the gift uses lifetime exemption: up to the $15,000,000 for 2026 (Rev. Proc. 2025-32, section 2.14).
• The donor must keep nothing. Section 2036(a) includes property if the donor retained “the possession or enjoyment of, or the right to the income from, the property”; section 2038(a)(1) includes it if the donor can alter, amend, revoke or terminate.
• The beneficiary spouse must not hold a general power. Sections 2041(a)(2) and 2514(b) tax the exercise or release of a general power of appointment, with an exception for powers limited by “an ascertainable standard relating to the health, education, support, or maintenance” of the holder (section 2041(b)(1)(A)).
• The reciprocal trust doctrine. When each spouse creates a trust for the other, the Supreme Court held in United States v. Estate of Grace, 395 U.S. 316 (1969), that the doctrine “requires only that the trusts be interrelated” and that the arrangement, to the extent of mutual value, leaves each settlor in approximately the same economic position as if each had named himself or herself. The Court said it does not depend on a showing of tax-avoidance motive or of a bargained exchange.

Public Law 119-21 struck the end date of the doubled exemption, so a gift now is not racing a statutory deadline (our reading). Where a married couple wants to move appreciating assets, an annuity trust is another route, which we cover in the GRAT guide. A policy wrapped as private placement life insurance is a different product with different tax tests, covered in our PPLI guide.

What a reader can do with this

What the documents let you check before talking to anyone:

• Add up the estate on a Form 706 basis: all assets at fair market value, including every life insurance policy on your life that you own or can change, and taxable gifts since 1977. Compare it with $15,000,000 (or $30,000,000 with portability) and with your state’s number in the table.
• Separate the three numbers an ILIT touches: the amount of death benefit counted today, the estate with and without it, and what the estate would have to pay in 9 months. Cases A, B and D above are the template.
• List the powers you hold on every policy: owner, beneficiary change, loans, assignment. Any one of them is an incident of ownership.
• Check the premium schedule against the gift rules: $19,000 per recipient for 2026 for present-interest gifts, and a Form 709 for anything above it.
• Check the 3-year date: if a policy is already owned personally, the date of any assignment starts the clock.

The decision, and who makes it. An ILIT is a trust agreement drafted by an estate-planning attorney; the gift tax return is prepared by a CPA or the attorney; the insurance contract is placed by a licensed insurance professional, and nothing on this page is a recommendation to buy a policy. A financial adviser’s part is the other half of the question: how much of the estate is liquid, which assets would be sold to pay a state or federal tax due 9 months after death, and how that fits retirement income. Families with larger estates often coordinate this through a family office.

This is analysis of public documents, not investment, legal or tax advice.

FAQ

Sources, read and saved on October 20, 2026: 26 U.S.C. 101, 2001, 2010, 2035, 2036, 2038, 2041, 2042, 2056, 2058, 2503, 2514, 2523, 2631, 6018, 6075 and 6166, United States Code 2024 edition (govinfo.gov); Public Law 119-21, section 70106 (govinfo.gov); Rev. Proc. 2025-32 (irs.gov); 26 CFR 20.2042-1, 20.2036-1 and 25.2503-3 (eCFR, as of October 1, 2026); Instructions for Form 706 (Rev. July 2026) and Instructions for Form 709 (2025) (irs.gov); United States v. Estate of Grace, 395 U.S. 316 (1969) (Cornell Legal Information Institute copy); IRS Statistics of Income, Table 1, Estate Tax Returns Filed in 2024 (xlsx with the scripts that read it); Oregon Department of Revenue 2026 Form OR-706 instructions; Revised Code of Washington 83.100.020 and 83.100.040; Massachusetts DOR Estate Tax Guide; Minnesota Statutes 291.016 and 291.03; 35 ILCS 405/2 and the Illinois Attorney General fact sheet; Rhode Island Division of Taxation ADV 2025-27; District of Columbia Code 47-3702 and the 2026 D-76 instructions; Vermont Statutes title 32, section 7442a; Maryland Tax-General 7-309; Hawaii Form M-6 instructions (Rev. 2025); New York Tax Law 952 and the Department of Taxation and Finance estate tax page; Maine Revenue Services and 36 M.R.S. 4103; Connecticut General Statutes chapter 217. Shares, averages and worked examples are our arithmetic, with the assumptions stated. This is analysis of public documents, not investment, legal or tax advice.