ILIT is an acronym for Irrevocable Life Insurance Trust. It is an irrevocable (meaning it cannot be changed once established) trust that is used to purchase and own life insurance on an individual for the benefit of the trust beneficiaries (usually children, spouse or significant other, but it could be anyone). The reason this may be desirable is that the life insurance in a properly-structured ILIT is not subject to the estate tax. (Contrary to popular belief, life insurance benefits are subject to the estate tax. And a gift of life insurance would generally be subject to gift tax.)
Usually an ILIT is used for one of two reasons. The first is as a way to leave more money to heirs than the current threshold allows without paying the estate tax. The other is to provide cash (free of the estate tax) for heirs to use to pay estate tax on assets that cannot be easily sold or that the family does not want sold, such as real estate or a business. It may also be desirable to provide cash to allow family member’s to buy a business interest.
There are very particular tax rules for ILITs, so this is not a do-it-yourself project. Also, it is highly preferable to form the ILIT and then let the ILIT purchase the life insurance and not the other way around. Once again, the key to estate planning is planning.