ILIT for NRIs: Do You Actually Need One?

An ILIT may be worth considering if you are domiciled in the US for estate tax purposes and your worldwide estate, including applicable life insurance proceeds, could exceed the $15 million federal basic exclusion amount for 2026.

Beyond tax, ILIT estate planning can also control how beneficiaries receive ILIT life insurance proceeds, for example, in installments rather than a lump sum.

What is an ILIT?

Life insurance is often bought to protect a family, but in the US, the payout itself can be included in a taxable estate. An irrevocable life insurance trust (ILIT) is the standard US tool to prevent that. An Irrevocable Life Insurance Trust is a trust that owns a life insurance policy on your life and receives the payout when you die. Because the trust, not you, owns the policy, the proceeds can be kept out of your taxable estate. The trust is usually created and funded by the insured, and it must be structured so that the insured keeps no rights over the trust or the policy.

In practice, you give money to the trust each year, and the trustee uses it to pay the premiums. When you die, the trustee collects the death benefit and holds or distributes it for your spouse, children or other beneficiaries, as the trust deed sets out.

The policy itself is often called ILIT insurance or ILIT life insurance: an ordinary life policy whose owner and beneficiary is the trust.

ILIT Meaning

ILIT meaning: ILIT stands for Irrevocable Life Insurance Trust. "Irrevocable" means that once it's set up, you can't cancel it or change its terms; "life insurance trust” means its main asset is a life insurance policy.

Does an NRI Need an ILIT?

The answer depends on your US estate tax status, which is determined by domicile rather than by your passport

For nonresidents, Section 2105(a) of the US tax code treats proceeds of insurance on their own life as property outside the US, so the payout is not included in their US gross estate.

Green card holders need to assess their US estate tax domicile separately. Although a green card can be evidence of US domicile, it is not conclusive on its own. If you are domiciled in the US for estate tax purposes, your worldwide estate, including life insurance proceeds subject to the applicable inclusion rules, may be considered when calculating your estate tax liability.

How a Life Insurance Trust Works?

Life insurance and trusts work together in a simple way. An ILIT trust is usually created by the insured person, who must keep no rights over the trust or the policy:

• You set up the trust with a US attorney and appoint a trustee.

• The trust buys a policy on your life, and is both its owner and beneficiary.

• You give money to the trust each year, and the trustee uses it to pay the premiums.

• When you die, the trustee collects the death benefit and holds or distributes it for your spouse, children or other beneficiaries, as the trust deed sets out.

When an ILIT Makes Sense?

A large estate domiciled in the US

Suppose a green card holder domiciled in the US has $12 million in assets, including a flat in Mumbai, and a $5 million policy in their own name. The payout pushes the estate to $17 million, so about $2 million could face tax at 40%. Held in an ILIT, the $5 million stays outside the estate

A spouse who is not a US citizen

The unlimited federal estate tax marital deduction generally does not apply when assets pass directly to a non-US-citizen spouse. A Qualified Domestic Trust (QDOT) may allow the marital deduction if the applicable requirements are met. An ILIT can also be structured to provide life insurance proceeds for a non-US-citizen spouse while keeping the policy proceeds outside the insured’s estate, provided the trust is properly structured and the insured retains no incidents of ownership.

Children or family who need managed payouts

A trustee can release money over time, such as for education, rather than handing a large sum to a young beneficiary at once.

NRIs planning to move to the US

If you expect to take up a green card later, setting up the structure early avoids having to transfer a policy you already own.

When is an ILIT Unnecessary?

You are an NRI living in India

Your life cover, whether from an Indian or US insurer, generally sits outside the US estate already, so an ILIT insurance trust adds cost without any US estate tax savings. For most NRIs, the more useful step is choosing the right term insurance for NRIs to protect their family, without the expense of setting up a trust

Your estate is well below $15 million

Most green card holders, even with a sizeable policy, stay under the exemption. With no estate tax due, there is nothing for the trust to save.

You want flexibility

Once the trust is set up, you cannot change beneficiaries, personally borrow against the policy or cancel the trust.

The running costs outweigh the benefits

Most ILITs need a US attorney to draft the trust, and a professional trustee usually charges annual fees. The trustee must also send written notices to beneficiaries each year, and failing to do so can create gift tax problems.

Who can be an IILT Trustee?

An ILIT trustee manages the trust: paying premiums, sending yearly notices to beneficiaries, and collecting and distributing the payout. You can't be the trustee of your own ILIT. The trustee can be a trusted family member or friend, or a professional trustee such as a bank or trust company, which charges annual fees. Many families choose a professional trustee for long-lasting trusts or large payouts.

How the Life Insurance Trust is Funded?

A life insurance trust fund is built mainly from your yearly gifts to the trust, which the trustee uses for premiums. These gifts can qualify for the annual gift tax exclusion if beneficiaries get a short right to withdraw them (Crummey notices, explained below). After your death, the trust fund holds the policy payout and is managed as the trust deed sets out.

Key ILIT Rules to Know

The three-year rule comes from Section 2035 of the US tax code. The safer route for most families is to have the trust apply for a new policy from the start.

For Indian families, two practical points matter. ILITs are US trusts that typically hold US-issued policies and are set up with a US attorney and trustee. And if you are US-domiciled, life policies you own in India also count towards your US estate, so they should be included when you assess whether you are near the exemption.

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