The hospital is the idea of Southland farmer Blair Vining and his wife Melissa.
Blair Vining died last October after a year-long battle with bowel cancer, during which he devoted his time to campaigning for better cancer care for all New Zealanders.
The ILT trust this morning announced it was donating the Clifton Club Inn in south Invercargill to the project.
The tavern is near to Southland Hospital and will continuing operating as a pub until the charity hospital trust is ready to redevelop it.
Melissa Vining said she was blown away by the gesture.
"I was in tears the whole way from Invercargill to Winton," she said.
"It's just an incredible gift for the people of our community and makes me so proud of where I come from. I just don't think something like this would have happened anywhere else in the country. Southlanders are renowned for supporting those who need it, but I never could have imagined an organisation doing what ILT has just done. It's indescribable."
It was fitting tribute for her husband, she said.
"Not only will this hospital serve as a legacy for Blair and all of his work towards creating better cancer care for all of New Zealand regardless of where you live. I strongly believe the government has a responsibility to provide the best health care for all of us but in the interim while I keep working away at trying to change that the hospital will provide much needed relief to Southerners immediately."
The timeline for the hospital's development would be announced at a later date, but Southland Charity Hospital Trust chairman Dr Murray Pfeifer said he was hopeful it would be up and running by the end of next year.
In the meantime a colonoscopy service to those ineligible for public services and unable to afford private care would be offered to all residents south of the Waitaki River.
The hospital would be covering the entire Southern DHB area as it had recognised a need, Dr Pfeifer said.
The donation of the tavern had fast-tracked the opening of its bricks-and-mortar operation.
"This is an unbelievably generous gift to the people of the south and will ensure more members of our community are able to access vital health treatment they need," he said.
ILT chief executive Chris Ramsay said all the tavern's staff would be accommodated in the trust's 23 other premises and there would be no job losses.
"We were always motivated to find a way to make a significant contribution to such a worthy project. Once we reviewed the best future use of the Clifton it became clear this would be a fantastic way for this asset to benefit our community."
He had spoken to patrons of the tavern and while they felt disappointment at its closure, they were supportive of its future with many having seen the effects of cancer first-hand and supportive of Blair Vining's work, Ramsay said.