For Houston families, especially in River Oaks, Memorial, West University Place, and Bellaire, now is a smart time to reassess how life insurance proceeds flow to heirs. While Texas has no state estate or inheritance tax, current federal law sets the basic estate and gift tax exclusion at $13.99 million per person for 2025 and $15 million per person starting in 2026, with future inflation adjustments. A well-structured Irrevocable Life Insurance Trust (ILIT) can help you keep more wealth outside the taxable estate and simplify future administration.
Secure your financial future with the help of an experienced estate planning attorney in Texas. At The Law Office of Whitney L. Thompson, our dedicated Houston trust attorneys can be your trusted allies in understanding these important financial tools. We can assist you with ILITs and create a robust plan for your estate. Contact us today at (281) 214-0173 to schedule a consultation and secure your family’s financial well-being.
What Is A Life Insurance Trust?
A life insurance trust is a legally structured arrangement that serves as a strategic tool for individuals with substantial wealth. It plays a pivotal role in reducing estate taxes during the transfer of life insurance policies. These trusts serve as an integral component of an individual’s estate planning strategy, ensuring financial security for their loved ones in the event of an untimely passing. However, it’s important to note that life insurance proceeds may be subject to taxation, which could reduce the final amount that beneficiaries receive.
Establishing a life insurance trust offers numerous benefits, including:
- Estate Tax Reduction: The primary aim of setting up a life insurance trust is to minimize estate taxes. By transferring a life insurance policy into the trust, the policyholder effectively removes it from their taxable estate. This strategic move results in substantial tax savings for their heirs.
- Controlled Asset Distribution: In situations where a life insurance policy pays directly to beneficiaries, those beneficiaries gain full discretion over how to utilize the proceeds. In contrast, a life insurance trust grants the policyholder to establish specific guidelines regarding the timing and manner in which the policy proceeds are distributed.
- Creditor Protection: A life insurance trust can shield the policy proceeds from potential creditors. This protection becomes crucial for individuals with a high net worth or those exposed to significant liability risks.
When it comes to securing your family’s financial future, a life insurance trust can be a crucial component of your estate planning. At The Law Office of Whitney L. Thompson, our Houston trust attorney can assist you in handling the details of establishing and managing a life insurance trust. With our extensive knowledge and experience in estate planning, we can help create legal instruments that protect your assets and your loved ones even after you’re gone. Contact us today to schedule a consultation.
| Feature | Details | Texas-Specific Notes |
|---|---|---|
| Estate Tax Reduction | Removes the life insurance policy from the taxable estate to lower federal estate taxes | Texas does not have a state estate tax, but federal estate tax applies to large estates |
| Controlled Asset Distribution | Allows the policyholder to set rules for how and when beneficiaries receive funds | Useful for families with minor children, dependents with special needs, or concerns about spending habits |
| Creditor Protection | Trust structure can protect insurance proceeds from creditor claims | Texas law generally supports asset protection, especially when the trust is irrevocable and properly drafted |
Houston Trust Attorney
Whitney L. Thompson
Whitney L. Thompson is a dedicated Houston attorney who helps individuals and families protect what matters most through thoughtful planning. From wills and revocable living trusts to powers of attorney and guardianship arrangements, Whitney guides clients in creating plans that reflect their values, goals, and family dynamics. Her work began at Thurgood Marshall School of Law in the school’s wills, probate, and guardianship clinic, where she advocated for residents facing real-world estate and probate challenges.
As a first-generation college graduate and woman entrepreneur, Whitney understands how overwhelming legal and financial planning can feel, especially when emotions are high or family conflict is involved. Drawing on her courtroom experience, she emphasizes proper planning to avoid future disputes, unexpected tax burdens, and costly litigation. Whether you’re setting up a trust, providing for a loved one, or coordinating an overall estate plan, Whitney offers clear advice, compassionate support, and practical solutions tailored to your family’s needs.
Understanding Irrevocable Life Insurance Trusts and Other Taxations
To address potential transfer tax exposure, many use an ILIT to keep life insurance proceeds outside the taxable estate and provide liquidity for heirs. The asset of the trust will be one or more life insurance policies. However, beware that once an Irrevocable Life Insurance Trust (ILIT) is created, it cannot be rescinded, modified, or amended. There are several important requirements to properly create and maintain an ILIT, and each requirement helps explain the nature of such a trust.
- Best practice is for the grantor not to serve as trustee. A grantor-trustee who retains any “incidents of ownership” over a policy (e.g., powers to change beneficiaries or control policy rights) can cause the death benefit to be included in the taxable estate under IRC §2042. Careful drafting and the use of an independent trustee are commonly employed to avoid this risk. It is crucial to name a trusted person or financial institution to act as a responsible trustee.
- The trust itself must be the owner of the life insurance policy. If you transfer an existing policy to the ILIT and die within three years of the transfer, the death benefit is pulled back into your gross estate under IRC §2035. Having the ILIT apply for and purchase a new policy avoids this three-year inclusion rule.
- The trust must pay the policy premiums, and you must transfer funds to the trust for that purpose. This situation can create an issue with gift taxes because transfers to a trust generally don’t qualify for the annual gift tax exclusion unless beneficiaries have a present-interest right (often implemented with “Crummey” withdrawal powers). For 2025, the annual exclusion is $19,000 per recipient. To qualify as a gift for a tax exclusion, the recipient must have a “present interest” in the money. To accommodate this requirement, you can use what is known as “Crummey” power, giving beneficiaries a limited right to withdraw contributions (typically 30–60 days, in practice) so the gifts qualify as present-interest amounts under the annual exclusion. Trustees typically send Crummey notices informing beneficiaries of their temporary withdrawal right; a 30–60 day window is common practice, though not mandated by statute or the Crummey decision itself. After thirty days, the trustee can pay the annual insurance premium with the funds. Although you run the risk that the beneficiaries will withdraw these funds, if you make it clear that the financial benefit is greater in the future, it should not present a problem.
- Generally, the beneficiary of the life insurance policy is the trust. After the funds are deposited into the trust, the trustee can distribute the assets to the beneficiaries as specified in the trust. If your beneficiaries are still minors, you can instruct the trustee to wait until they reach a certain age. Leaving the assets in the trust can also protect them from the beneficiaries’ creditors.
ILITs can own both individual and second-to-die life insurance policies. All premium payments should come from a bank account owned by the ILIT. The downside of an ILIT is that it is irrevocable. However, your ILIT is a powerful tool that can minimize your estate taxes, avoid gift taxes, protect assets and government benefits, control the timeline of distribution to beneficiaries, and more. If you would like to discuss whether an ILIT may be right for you, give us a call. Contact our Houston office at (281) 214-0173 to schedule an appointment and discuss how we can help you with your legal matters.
Modifying or Terminating an Irrevocable Life Insurance Trust
Changing or ending an irrevocable life insurance trust (ILIT) in Texas is rarely simple. Once the trust is created, the terms are meant to stay in place permanently. However, in limited cases, some modifications may be possible. For example, the trust document itself may allow you to appoint a new trustee. In other situations, any change or termination might require approval from all trust beneficiaries, a court order, or both.
Because of these restrictions, altering an irrevocable life insurance trust can be a lengthy and costly process. Even when the situation seems straightforward, the legal and financial implications can be significant. Courts may only allow modifications if the purpose of the trust can no longer be achieved or if all parties agree that a change is in everyone’s best interest.
Before creating an irrevocable life insurance trust, it’s important to understand that flexibility is limited. You shouldn’t assume that you or your beneficiaries will be able to change or cancel it later. Taking the time to discuss your goals and long-term needs with an experienced Houston trust attorney can help you decide if an irrevocable life insurance trust is right for you. Once it’s set up, making adjustments can be difficult, so careful planning at the start is essential to avoid issues in the future.
What are the Disadvantages of an Irrevocable Insurance Trust?
Setting up an irrevocable life insurance trust (ILIT) involves several significant disadvantages that potential trust creators should carefully consider:
- High Costs: Establishing an ILIT can be expensive. It typically requires the experience of an estate or trust attorney to draft the trust documents correctly. This process can cost thousands of dollars, not including ongoing administrative fees and the costs associated with appointing and compensating a trustee.
- Inflexibility: Once established, an ILIT is nearly impossible to alter or revoke. This rigidity means that if your circumstances or intentions change, you cannot modify the trust to suit your new needs. For example, you cannot transfer the life insurance policy out of the ILIT if you decide it would be better managed elsewhere or if a more favorable financial strategy arises.
- Complexity in Setup and Management: The process of setting up an ILIT is complex. It requires a thorough understanding of estate planning, IRS regulations, and trust law, which can be overwhelming for many individuals. This complexity often necessitates ongoing professional advice and management, which can be both stressful and costly.
While ILITs can offer significant estate tax benefits, they come with high costs, a lack of flexibility, and management complexity. These factors make them less suitable for some individuals, highlighting the importance of thorough planning and advice when considering this estate planning tool.
At The Law Office of Whitney L. Thompson, our Houston trust attorneys can guide families across River Oaks, West U, Bellaire, Memorial, Houston Heights, Montrose, Midtown, and the Museum District through ILIT design and administration. We understand the challenges and unique considerations that come with managing these types of trusts. We can assist you in setting up an irrevocable life insurance trust tailored to your specific financial goals. Contact us at (281) 214-0173 to schedule a consultation and explore how we can help you protect and manage your wealth effectively.
