What is the primary purpose of an irrevocable life insurance trust?

The primary purpose of an irrevocable life insurance trust (ILIT) is to exclude life insurance proceeds from the grantor's taxable estate. By transferring ownership of a life insurance policy to an ILIT, the grantor ensures that the policy's death benefit will not be included in their gross estate for estate tax purposes upon death. This can significantly reduce the estate tax liability and provide greater financial support for beneficiaries.

This type of trust cannot be modified by the grantor once it is established, which is why it is termed "irrevocable." This feature is crucial to achieving the intended tax benefits, as any retained control or ownership by the grantor could result in the inclusion of the policy's value in the estate. The trust also allows for the management of the life insurance proceeds, ensuring they are distributed according to the grantor's wishes.

In contrast, a trust that can be modified by the grantor at any time would not be irrevocable and would not provide the same estate tax benefits as an ILIT. A trust intended solely for charitable donations typically falls under different classifications, such as charitable remainder or charitable lead trusts. Lastly, a trust that allows the grantor to retain ownership of the assets counters the very purpose of an ILIT