Irrevocable Life Insurance Trust (ILIT)

Irrevocable Life Insurance Trust (ILIT)

An Irrevocable Life Insurance Trust (ILIT) is a type of trust that is designed to own and receive the benefits of a life insurance policy. Once established, the terms of the trust cannot be changed or revoked by the grantor. The primary purpose of an ILIT is to remove life insurance proceeds from the grantor’s taxable estate, thereby potentially reducing estate taxes upon the grantor’s death.

When the insured individual passes away, the death benefit is paid to the ILIT, and the proceeds can be distributed to beneficiaries according to the terms of the trust, typically free from income and estate taxes. This structure allows for greater control over the distribution of the life insurance benefits and can serve to provide liquidity for estate settlement costs or to fund specific bequests.

For example, if a parent establishes an ILIT and names it as the beneficiary of their life insurance policy, the death benefit received by the trust will not be included in the parent’s estate, thus avoiding estate tax implications.