IRREVOCABLE LIFE INSURANCE TRUST
Back to GlossaryDefinition
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 trust owns a life insurance policy on the grantor's life. Once established, the grantor cannot modify or revoke the trust, and the life insurance proceeds are paid directly to the trust upon the grantor's death. This structure removes the policy from the grantor's taxable estate, potentially saving significant estate taxes while providing liquidity to beneficiaries or the estate to pay taxes and expenses.
Usage Context
Critical for understanding advanced estate planning strategies, particularly when studying estate and gift taxation, wealth transfer techniques, and situations involving high-net-worth individuals who need to minimize estate taxes while providing for beneficiaries.
Common Confusions
- Thinking they can change or revoke the trust once it's established
- Assuming they can still be the beneficiary of their own life insurance policy in the trust
- Believing the life insurance proceeds will be tax-free to their estate (not understanding estate tax vs. income tax)
- Confusing ILITs with revocable living trusts
- Not understanding the three-year rule and its impact on existing policies
