An irrevocable life insurance trust, often called an ILIT, is a trust specifically designed to own and manage life insurance policies outside the insured's taxable estate. Because the trust, rather than the insured, owns the policy and controls incident of ownership rights, properly structured ILITs can keep death benefit proceeds from being included in the insured's estate for estate tax purposes. The trust receives death benefits income tax free under general life insurance rules and then uses them to provide liquidity for estate settlement, pay estate tax, equalize inheritances, or support long term family or charitable goals. ILITs are typically irrevocable, meaning the grantor cannot freely change terms once established, and are often funded through annual exclusion gifts, supported by Crummey withdrawal powers to qualify contributions as present interest gifts.

In practice, ILITs are a cornerstone of advanced life insurance and estate planning for high net worth families and business owners. Advisors help clients work with attorneys to draft the trust, select an independent trustee, and define distribution provisions for spouses, children, and other beneficiaries. The ILIT applies for and becomes owner and beneficiary of new policies, or in some cases receives ownership of existing policies, with attention to the three year rule under IRC Section 2035. Each year, the grantor contributes funds to the trust, the trustee issues Crummey notices to beneficiaries, and premiums are paid. At the insured's death, the ILIT receives death benefits free of income tax and typically outside the taxable estate, providing liquidity to purchase illiquid assets, loan funds to the estate, or support family wealth transfer goals. Advisors must explain administrative responsibilities, funding discipline, and the irrevocable nature of the structure so clients understand both the tax advantages and the long term commitment an ILIT represents.