ILIT
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An irrevocable trust that owns and holds life insurance on its grantor's life. An ILIT is also known as a wealth replacement trust (WRT).
Summary
An Irrevocable Life Insurance Trust (ILIT) is a specialized estate planning tool where life insurance is owned by a trust that cannot be changed or cancelled once established. The trust owns the life insurance policy on the grantor's life, and upon death, the insurance proceeds are paid to the trust rather than the insured's estate. This arrangement helps reduce estate taxes since the insurance proceeds are not included in the taxable estate, while providing liquidity to pay estate taxes or support beneficiaries.
Usage Context
Understanding ILITs is crucial when studying advanced estate planning strategies, particularly for high-net-worth individuals facing significant estate tax liabilities. This concept is essential when analyzing tax-efficient wealth transfer techniques and life insurance planning.
Common Confusions
- Thinking they can still control or modify the trust after it's established
- Believing the insurance proceeds go directly to beneficiaries instead of the trust
- Not understanding the three-year rule if transferring existing policies
- Confusing ILITs with revocable life insurance trusts
- Assuming all life insurance automatically avoids estate taxes
