The 75-year-old was presented with the Spirit of Independence Award before her movie Grandma opened the eight-day festival with a star-studded premiere.
Lily is best known for her roles in classic films 9 To 5 and Nashville, as well as the more recent I Heart Huckabees.
In Grandma she plays a self-described misanthrope, a role written specifically for her by director Paul Weitz.
Walking the red carpet in Los Angeles, she said she hoped the film would broaden people’s minds.
“I hope they feel more accepting of all kinds of people and understand the kind of humanity between the three women in the film, the grandmother, daughter and granddaughter”, she said. “It’s a story about three generations of women, as well as many other things.”
She added: “To be able to play a woman of this age, I was gratified and thrilled that Paul prepared the role for me.”
Lily was joined by co-stars Judy Greer, Marcia Gay Harden, Sam Elliot and Julia Garner for the premiere and the cast embraced as they posed for photographers.
Paul, who is best known for directing About A Boy, was inspired by Lily when they worked together on another film. He said: “Aside from the thick Mexican accent, she is a little like my grandmother, her nickname was ‘the General’, and she was very tough and didn’t put up with anything.
“But really I was inspired to do it by hanging out with Lily. She played Tina Fey’s mother in a movie I made called Admission, and just hanging out with her off set made me want more scenes. I had this idea and wrote it with Lily’s voice in my head and she tears a path through the movie.”
He added: “It could have only been her, I would have been in real trouble because everything was fashioned for her and when I had the script and gave it to her she gave me so many ideas, both funny and real and painful moments that she’s been through. She’s an iconic figure who has been through so many years of women’s history.
“You can tell she is following her own drummer and doesn’t give a damn, she’s completely her own person and it doesn’t matter if she’s 70, 30 or 50 and that is really attractive.”