Glossary: Irrevocable Life Insurance Trust (ILIT)

An irrevocable life insurance trust (ILIT) is a trust that holds life insurance policies, designed to remove the proceeds from the taxable estate of the insured.

It is commonly used in estate planning to help reduce estate taxes and control how insurance payouts are managed and distributed.

What an ILIT does

An ILIT places a life insurance policy inside a separate legal trust structure.

It helps:

• keep insurance proceeds outside the taxable estate
• ensure payouts go directly to beneficiaries
• provide control over how funds are distributed

Because the trust owns the policy, the insured does not.

Why you need an ILIT

An ILIT is useful if you want to manage life insurance proceeds in a structured and tax-efficient way.

Without an ILIT:

• insurance payouts may be included in the taxable estate
• distribution may be less controlled
• tax exposure may be higher (depending on jurisdiction)

With an ILIT:

• estate taxes may be reduced
• beneficiaries can receive funds more efficiently
• distribution rules can be clearly defined

What an ILIT includes

An ILIT typically involves:

• a trust agreement
• a trustee who manages the trust
• a life insurance policy owned by the trust
• designated beneficiaries

The trustee oversees the policy and distributes proceeds according to the trust terms.

What an ILIT does NOT do

An ILIT does not:

• allow the insured to retain control over the policy
• function as a revocable or flexible arrangement
• replace a broader estate plan

Once established, it is irrevocable, meaning it generally cannot be changed easily.

When you need an ILIT

An ILIT may be relevant if:

• you have significant life insurance coverage
• you want to reduce estate tax exposure
• you want structured control over payouts

It is typically considered in more advanced estate planning.

Common mistakes

Some common issues include:

• not understanding the loss of control
• setting up the trust incorrectly
• failing to transfer ownership properly
• not maintaining the policy within the trust

An ILIT must be properly structured and maintained to be effective.

Related documents

• Life Insurance
• Trust
• Estate Planning
• Beneficiary

Practical note

An ILIT should be:

• carefully planned with professional guidance
• clearly documented
• aligned with your broader estate planning strategy