IRREVOCABLE LIFE INSURANCE TRUST (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 the grantor permanently transfers ownership of a life insurance policy to a trust that cannot be changed or revoked. The grantor gives up all control over the policy, but in return, the death benefit is removed from their taxable estate, potentially saving significant estate taxes. The trust becomes the owner and beneficiary of the policy, and the grantor typically makes annual gifts to the trust to pay the premiums. When the grantor dies, the trust receives the insurance proceeds tax-free and can distribute them according to the trust terms, often replacing wealth that was reduced by estate taxes on other assets.
Usage Context
Critical for understanding advanced estate planning strategies, particularly when studying estate and gift taxation, wealth transfer techniques, and strategies for high-net-worth individuals seeking to minimize estate tax liability while providing for beneficiaries.
Common Confusions
- Thinking the grantor can still control or modify the trust after it's established
- Confusing ILITs with revocable life insurance trusts
- Not understanding that the grantor must give up all incidents of ownership
- Assuming the insurance proceeds are automatically tax-free without proper ILIT structure
- Thinking wealth replacement trusts are different from ILITs when they're the same thing
