An Irrevocable Life Insurance Trust (or "ILIT") is an irrevocable trust designed to hold a life insurance policy on the grantor which is used to fund the trust upon the grantor's death while avoiding otherwise applicable estate taxes. An ILIT is typically designed to: (1) pass wealth to the grantor's family (or other objects of the grantor's affection) for their support and maintenance; (2) provide liquidity to pay estate taxes due upon the grantor's death; and/or (3) provide a combination of wealth replacement and asset liquidity. A properly structured ILIT will typically accomplish the grantor's goals in a completely estate and gift tax free manner.

Generally speaking, the overall scheme works as follows: The grantor initially funds the ILIT with a cash gift for its beneficiaries made via transfer to the ILIT's trustee. In order to secure the tax benefit, the trustee then informs the ILIT's beneficiaries of the cash gift held in trust for their benefit and affords them a brief window of opportunity to take their share of it. If the beneficiaries do not take the gift from the ILIT, the trustee uses the cash to purchase a life insurance policy on the life of the grantor. Typically inexpensive term insurance is used and the annual gifts the grantor makes are equal to the life insurance policy premium. Alternatively, "second to die" policies may be used when the client's primary concern is to provide liquidity for payment of estate taxes upon the death of a surviving spouse. Upon the funding of the ILIT, there will be estate tax free life insurance proceeds to benefit the grantor's surviving family.

Contrast the estate tax savings of an ILIT with the estate tax consequences of simply purchasing a life insurance policy, which would be entirely includible for federal estate tax purposes under current law) and it is easy to see the tax savings benefit of the use of an ILIT.