Glossary term
Irrevocable Life Insurance Trust (ILIT)
An irrevocable life insurance trust is a trust designed to own life insurance outside the insured person's estate, if structured correctly.
Updated
Read time
What Is an Irrevocable Life Insurance Trust (ILIT)?
An irrevocable life insurance trust, or ILIT, is a trust designed to own one or more life insurance policies outside the insured person's estate if the structure is created and maintained correctly. The trust, not the insured individual, owns the policy and receives the death benefit.
ILITs are used mostly in estate planning, especially when life insurance is intended to create liquidity, support heirs, fund estate taxes, equalize inheritances, or keep policy proceeds under trustee control. They are not casual documents. Once created, an irrevocable trust is difficult or impossible to change without legal authority.
Key Takeaways
- An ILIT is an irrevocable trust designed to own life insurance.
- The trust structure may help keep policy proceeds outside the insured's taxable estate if properly handled.
- The insured generally should not retain incidents of ownership over the policy.
- Premium gifts, trustee notices, beneficiary terms, and administration details matter.
- An ILIT should be drafted and administered with qualified legal and tax guidance.
How an ILIT Works
The grantor creates the trust and names a trustee and beneficiaries. The trust may apply for a new life insurance policy or receive an existing policy. The trustee manages the policy, sends notices when required, pays premiums from trust assets, and distributes proceeds after the insured's death according to the trust terms.
Role | What the role does | Why it matters |
|---|---|---|
Grantor | Creates and funds the trust. | Must avoid retaining control that could pull proceeds back into the estate. |
Trustee | Administers the trust and policy. | Handles premium payments, notices, records, and distributions. |
Insured | The person whose life is insured. | Death triggers the policy benefit. |
Beneficiaries | Receive benefits under trust terms. | May receive distributions directly or over time. |
Insurance carrier | Issues the policy and pays the death benefit. | Policy ownership and beneficiary designations must align with the trust plan. |
Estate Tax and Control Issues
Life insurance proceeds can be included in a decedent's gross estate in certain situations, including when proceeds are payable to the estate or when the decedent retained incidents of ownership in the policy. An ILIT is intended to avoid that result by separating ownership and control from the insured.
The details matter. Transferring an existing policy can create timing and estate-inclusion concerns. Premium gifts may require attention to gift tax rules and beneficiary withdrawal notices. A trustee who fails to administer the trust properly can weaken the plan.
Administration Details That Matter
Review trustee powers, premium funding, beneficiary withdrawal rights, gift tax treatment, policy ownership, and whether any incidents of ownership remain with the insured. An ILIT can fail its planning purpose if the trust is drafted well but administered casually.
The Bottom Line
An ILIT can be a powerful estate-planning tool for life insurance, but only when the ownership, trustee authority, premium funding, beneficiary terms, and tax details are handled carefully. It is not just a life insurance policy with a trust label attached.