Irrevocable Life Insurance Trust (ILIT)

An Irrevocable Life Insurance Trust, or ILIT, is a legal entity created specifically to hold a life insurance policy. Because the trust—not the insured person—owns the policy, the death benefit generally falls outside the insured's estate for federal estate tax purposes. The trust is irrevocable, meaning the grantor (the person who creates it) cannot take it back or alter its terms once established.

For families with substantial wealth, life insurance proceeds can themselves be large enough to increase an already-taxable estate meaningfully. An ILIT addresses this by removing the policy from the estate while still directing the proceeds to intended beneficiaries. The trustee typically receives annual gifts from the grantor to pay premiums, and beneficiaries are given a brief window to withdraw those gifts—a procedural step known as a Crummey notice—which helps the gifts qualify for the annual gift tax exclusion.

Consider a hypothetical founder who sold her logistics company and holds significant assets. She purchases a large policy inside an ILIT so that, at her death, the benefit passes to her children without being added to her already-substantial estate. A common confusion: people assume that naming a family member as beneficiary on a personally owned policy achieves the same result—it does not. Ownership, not beneficiary designation, determines estate inclusion. A qualified attorney must evaluate whether an ILIT suits any particular family's circumstances.