Irrevocable Life Insurance Trust (ILIT): A Wealth Replacement Trust

Irrevocable Life Insurance TrustDefinition

An irrevocable life insurance trust (ILIT; pronounced “eyelet” and also called a wealth replacement trust) is a trust that is funded, at least in part, by life insurance policies or proceeds. It is an effective estate planning tool that, if properly structured, may help avoid generation-skipping transfer, gift, and estate taxes, while providing a source of liquid funds to your estate for the payment of taxes, debts, and expenses. An ILIT can be either funded or unfunded.


  • You want to avoid generation-skipping transfer, gift, and estate taxes or provide liquidity to your estate
  • You are insurable
  • You execute an ILIT agreement
  • You transfer title to all contributed assets
  • You amend any existing contracts and documents to reflect the trust as the real party in interest

Key strengths

  • May help avoid generation-skipping transfer, gift, and estate taxes
  • Takes advantage of the annual gift tax exclusion
  • Replaces wealth to provide for your family
  • Provides cash to your beneficiaries so that your business can continue to operate after your death
  • May provide funds for the costs of settling your estate (if the estate is in a position to sell assets to the trust or repay a loan, with interest)
  • Provides for professional management of your assets
  • Avoids probate
  • Maintains your privacy
  • Trust assets may be protected from estate creditor’s claims

Key tradeoffs

  • Transfers may be subject to GSTT and/or gift tax
  • Trust document must include a Crummey withdrawal provision if you want to qualify for the present interest gift tax exclusion
  • Beneficiaries may have to include lapsed gifts in taxable estate
  • You lose control of your assets
  • May be costly

Variations from state to state

  • In community property states, couples owning community property and who qualify can give $26,000 per beneficiary under the present interest exclusion for gift tax without electing gift-splitting. Couples in common law states must affirmatively elect to split gifts.

How is it implemented?

  • Contact your insurance agent
  • Hire an attorney
  • Choose your beneficiaries
  • Select a trustee
  • Fund the trust
  • Serve proper Crummey notice on the beneficiaries
  • File gift tax returns, if necessary

Copyright 2006-2012 Broadbridge Investor Communication Solutions, Inc. All Rights Reserved

About The Author

Richard Eddy

Founder of and Cona Financial Group Richard Eddy has been assisting clients with their life insurance needs since 2005. He is an expert helping people find the right policy to fit their specific situation. In addition to insurance planning, he is also experienced in a wide range of financial planning topics including investment and portfolio analysis, tax planning, retirement planning and estate preservation strategies. You can call Richard toll-free at (877) 883-3561.