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    How To Use Your IRA To Fund An ILIT

    Lee HuffmanBy 8 Mins Read

    Estate planning is a complex subject, and many investors ignore it to avoid difficult decisions. When it comes to passing your IRA to loved ones when you die, the distribution rules and tax bill complicate things even further. One option people are starting to take advantage of is to distribute money from their IRA to an ILIT. Using an irrevocable life insurance trust (ILIT) as part of your estate plan can turn a taxable asset into a larger tax-free death benefit. Here’s everything you need to know about how to use your IRA to pay for an irrevocable life insurance trust, including what an ILIT is and how it can protect your assets, how to take money out of your IRA, and contribution limits for 2026.

    What is an ILIT?

    An Irrevocable Life Insurance Trust (ILIT) is what it sounds like. It’s an irrevocable trust that you create to hold your life insurance policy. Instead of holding your life insurance policy yourself, you place it inside the ILIT. You can then give the trust instructions on how the death benefit should be passed onto your loved ones when you pass away.

    This allows you to take advantage of how life insurance is taxed. If you hold your life insurance policy and can control it (i.e.: can change your beneficiary), the IRS considers that money part of your taxable estate when you pass. However, if you place that same policy in an ILIT, you no longer own or control the policy, so the money can pass to your loved ones tax-free.

    As stated earlier, this trust is irrevocable, which means you cannot change anything about the trust after it is set up. Additionally, you cannot be its trustee or have access to the money in the trust. For this reason, I recommend consulting your estate planning attorney and financial advisor before creating an ILIT.

    Using Your IRA to Benefit From An ILIT

    IRAs and life insurance are taxed very differently. When someone inherits a Traditional IRA, every dollar they pull out is taxed as normal income. And with the new stretch IRA rules, they will most likely have to empty that IRA out within 10 years. As mentioned above, your life insurance policy can let you access funds that may be taxed less than pulling from your IRA, while leaving a tax-free death benefit to your loved ones.

    So if you don’t need all the money in your IRA to live off of and you have a taxable estate, you can start distributing funds from your IRA into an ILIT to leave your loved ones more money than if you left them the IRA itself. This strategy can be a great alternative to the stretch IRA, and it can substantially increase how much you leave your loved ones when you pass away.

    Since I’m over 50 and getting closer to retirement age, I’m talking with my advisors on how to use an ILIT to create a larger estate for my family. Planning ahead removes some of the stress and urgency of setting one up. Plus, I may qualify for lower life insurance rates now than if I waited another 10 to 20 years to create one.

    5 Steps to Taking Money Out of Your IRA to Fund an ILIT

    Here are five simple steps to using money from your IRA to pay for an irrevocable life insurance trust.

    1. Distribute funds from your IRA. If you’re in the highest tax bracket, you probably aren’t gaining much by pulling smaller amounts each year. You may want to just take a bigger distribution instead of multiple smaller distributions.
    2. Pay taxes. Pay income taxes on the money you distributed from your IRA.
    3. Give that money to your ILIT. Try to stay within the annual gift tax limit.
    4. Pay life insurance premiums. Your trustee will pay the premium for your life insurance policy. Remember, you cannot be involved in this process.
    5. Tax-free distributions. Once you pass away, your ILIT will collect the death benefit tax-free and give it to your loved ones.

    When choosing a life insurance policy, compare different types of life insurance policies. Since you won’t need to have access to the money in the policy during your lifetime, buying term life insurance with a higher death benefit is the right choice over a permanent cash-value life insurance policy.

    3 Crucial Factors to Avoid Paying More Taxes On Your Estate

    Income tax and gifting rules can complicate the IRA to ILIT estate planning strategy. Make sure to stay under the annual gift limit when giving money to your ILIT to pay the premiums. In 2026, you can gift up to $19,000 to anyone per year.

    • Crummey trust. If the annual gift tax exemption is not enough, or you want to make a larger IRA distribution, a Crummey trust avoids the annual gift tax exclusion limits. Since this trust allows beneficiaries a limited window each time you make a contribution, the IRS counts it as a present interest and allows it to qualify for the annual exclusion. The Crummey trust then pays the ILIT premiums on your behalf.
    • Lifetime gift tax limits. Also remember that you are using up gift tax room by giving money to your ILIT. You may also want to take into consideration that your life insurance premium could go up.
    • Tax brackets. When distributing money from your IRA, keep income tax brackets in mind. Consider taking more out of your IRA in years where you have room to take more out without bumping into the next higher tax bracket.

    How an ILIT Can Help Protect Your Assets

    Placing your life insurance policy in an ILIT can protect your assets from your creditors and your beneficiaries’ creditors. Because the trust is irrevocable, the assets inside are completely separate from your personal finances. Therefore, they’re out of reach of anyone trying to sue you or make claims on your assets.

    You can also craft distribution rules that direct your trustee to distribute funds to beneficiaries in a way that protects them from creditors. These strategies can help prevent your assets from being seized if a loved one gets sued.

    2026 IRA Contribution Limits

    If you are still contributing to your IRA, keep in mind the maximum contribution limits and how your income may affect those caps for 2026.

    • The contribution limit is $7,500 in 2026, up from $ 7,000 in 2025.
    • If you are 50 or older, you can contribute an additional $1,100, for a total contribution of $8,600 in 2026.
    • Phase-out limits for IRA deductions are also increasing to $81,000 to $91,000 for single filers. If you are married and file jointly, your phase-out limit is $129,000 to $149,000 if you’re covered by a work retirement plan.
    • The Roth IRA phase-out increases to $153,000 to $168,000 for singles and Heads of Household.

    The Bottom Line

    A large IRA can create a large tax bill for your beneficiaries when you pass. If you have a taxable estate, you can use your IRA strategically to fund an irrevocable life insurance trust that minimizes taxes during your lifetime while creating a larger estate for your loved ones. Annual and lifetime gift tax limits, distribution rules, and yearly IRA contribution limits can make this strategy complicated, but the benefits are well worth it. Consult your estate planning attorney and financial advisor to see whether this makes sense for your family and how to structure it to maximize benefits before setting up your ILIT.

    Our articles provide information purely for educational purposes and do not constitute financial, tax or investment advice.  You should always consult with professionals like licensed financial advisors or accountants before making any decisions.  We aim to provide up-to-date and accurate information, but we make no guarantees regarding the accuracy or completeness of any content.  All our examples are provided for illustrative purposes and may not reflect your personal results. We are not liable for any losses or damages arising from your reliance on the information provided.

    Sources

    Lee Huffman is a financial services and insurance veteran with over 25 years of experience. He has held Series 6 and 63 securities licenses and a Life & Disability insurance license. Lee’s work experience includes selling life insurance and annuities at Trilogy Financial Services (National Planning Corporation broker/dealer) and CalFed (a regional bank acquired by Citibank). His insurance and personal finance writing has appeared in major outlets such as Forbes, Investopedia, FinanceBuzz and NerdWallet.

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