Irrevocable Life Insurance Trust (ILIT)

Irrevocable Life Insurance Trust (ILIT)

Purpose

This Irrevocable Life Insurance Trust (ILIT) is established to:

• Hold life insurance policies outside the insured's taxable estate under IRC § 2042
• Minimize federal estate taxes on the policy death benefit (currently excluded from taxable estate if trust does not retain incidents of ownership)
• Provide liquidity and management of insurance proceeds for beneficiaries
• Enable tax-free premium gifts through Crummey notice provisions (IRC § 2503 annual exclusion)

Key Estate Planning Benefits

• Estate Tax Exclusion: Properly structured ILITs exclude insurance proceeds from the insured's gross estate, saving up to 40% in federal estate taxes
• Current Federal Exemption: $15,000,000 per individual (2026, permanent under One Big Beautiful Bill 2025)
• Annual Gifting Strategy: Uses $18,000 annual per-donee gift tax exclusion (2024) to fund premium payments tax-free via Crummey powers
• Protections: Protects proceeds from beneficiary creditors, divorcing spouses, and failed probate

ARTICLE I: CREATION AND EFFECTIVE DATE

1.1 Declaration of Trust

[__________________] ("Grantor" or "Insured"), a resident of [__________________], does hereby declare and create this Irrevocable Life Insurance Trust ("Trust") on [__/__/____] ("Effective Date").

1.2 Irrevocable Nature

Grantor acknowledges that this Trust is irrevocable. Grantor hereby irrevocably transfers all right, title, and interest in the Trust property, including all incidents of ownership in any life insurance policies, and Grantor shall have no power to amend, alter, revoke, or terminate this Trust.

1.3 Governing Law

This Trust shall be governed by and construed in accordance with the laws of [__________________], without regard to conflicts of law principles.

ARTICLE II: DEFINITIONS

2.1 Insurance Policy

"Insurance Policy" or "Policy" means any life insurance policy on the life of Grantor held by the Trustee, including the policy issued by [__________________] with policy number [__________________], and any replacement or additional policies acquired during the Trust's duration.

2.2 Trustee

"Trustee" means the person or entity named below as Initial Trustee, and any successor Trustee qualified under Article V.

2.3 Beneficiaries

"Primary Beneficiaries" are:

• [__________________]
• [__________________]

"Contingent Beneficiaries" are:

• [__________________]
• [__________________]

"Final Beneficiary" (remainder): [__________________]

2.4 Crummey Withdrawal Right

"Crummey Withdrawal Right" means the limited power of withdrawal granted to beneficiaries in Article III, Section 3.4, exercisable for [____] days after notice of contribution.

ARTICLE III: TRUST PROPERTY AND CONTRIBUTIONS

3.1 Initial Property

Grantor hereby transfers to the Trustee the following property:

• Life insurance policy on Grantor's life issued by [__________________], Policy No. [__________________]
• Cash or securities valued at $[__________________]
• Other property: [__________________]

The Trustee shall hold, manage, invest, and reinvest the trust property as provided in this Trust Agreement.

3.2 Additional Contributions

Grantor may, but is not obligated to, make additional contributions to this Trust. All contributions shall become trust property and shall be held and distributed according to this Trust Agreement's terms. No contribution creates any power of amendment or revocation in Grantor.

3.3 Premium Funding Strategy

The Trustee shall use contributions and trust income to pay insurance premiums on the Policy. Before any premium payment, Grantor or the Trustee shall send written notice to each Beneficiary with a Crummey withdrawal right (Section 3.4), describing:

• The amount contributed
• The right to withdraw
• The deadline for exercise (typically 30–45 days)

3.4 Crummey Withdrawal Rights (IRC § 2503 Exclusion)

To the extent permitted by law, each Primary Beneficiary listed in Section 2.3 shall have the right, exercisable within [____] days of written notice by the Trustee, to withdraw from the Trust, in proportionate shares, the lesser of:

(a) The amount contributed to the Trust in that calendar year, or
(b) The amount of the annual per-donee gift tax exclusion under IRC § 2503(b) (currently $18,000; adjusted annually for inflation).

Important: Any withdrawal right not timely exercised shall lapse. The Trustee shall maintain written records of all Crummey notices sent and whether withdrawal rights were exercised or lapsed.

3.5 Three-Year Lookback Rule (IRC § 2035)

Grantor acknowledges that:

• If Grantor dies within three (3) years of transferring the Policy to this Trust, the full death benefit proceeds may be included in Grantor's gross estate under IRC § 2035(a)
• Transfers of Policies originally owned by Grantor retain this lookback exposure
• If Grantor survives the three-year period, the proceeds are generally excluded

Mitigation Strategy: To minimize § 2035 risk, Grantor should not transfer existing Policies into this Trust within three years of expected death (if known). Policies acquired and transferred to the Trust at inception avoid lookback exposure.

ARTICLE IV: TRUST ADMINISTRATION

4.1 Trustee Powers (General)

The Trustee shall have full power to:

(a) Collect all income and principal, including insurance proceeds
(b) Manage, control, and reinvest Trust property
(c) Exercise all rights, options, and powers associated with insurance policies, including:

• Paying premiums
• Taking loans against cash value
• Requesting illustrations and policy reviews
• Surrendering or exchanging policies
• Appointing new beneficiaries of the policy (if permitted)
  (d) Sell, exchange, or dispose of trust property
  (e) Borrow money and pledge property as security
  (f) Employ accountants, investment advisors, and attorneys as needed
  (g) Retain or abandon property as the Trustee deems appropriate

The Trustee shall not be required to register as a fiduciary with any governmental agency unless required by law.

4.2 Incidents of Ownership — Critical Restriction

The Trustee and all other parties shall NOT exercise or retain any incident of ownership in the insurance Policy. For purposes of IRC § 2042, incidents of ownership include:

• The power to change beneficiaries
• The power to surrender or modify the policy
• The power to borrow on the policy
• The power to pledge the policy as collateral
• Any power to control the policy's terms or distribution

Exception: The Trustee may exercise incidents of ownership necessary to preserve the policy and pay premiums (i.e., payment power is distinguished from control power). Once Grantor transfers the Policy, Grantor shall have no incidents of ownership.

4.3 Prohibition on Grantor Involvement

Grantor shall:

• Have no right to participate in Trust management
• Not vote Trust securities or direct investment
• Not receive any distribution or income from the Trust
• Not amend, revoke, or terminate the Trust
• Not control policy beneficiaries or terms

Violation of these restrictions may cause the Policy to be included in Grantor's estate under IRC § 2036 or § 2038.

4.4 Trustee Succession and Removal

The initial Trustee is: [__________________]

If the initial Trustee dies, resigns, is removed, or becomes incapacitated:

• Successor Trustee shall be: [__________________]
• If no successor is available or willing, the remaining beneficiaries (or majority if multiple) may appoint a successor Trustee

No Trustee shall have any personal interest in the Trust's income or principal, except as separately stated in writing.

ARTICLE V: DISTRIBUTION OF INCOME AND PRINCIPAL

5.1 During Grantor's Lifetime

During Grantor's lifetime, the Trustee shall:

(a) Collect and Accumulate: Collect all income and shall have absolute discretion to accumulate or distribute income for the health, education, maintenance, and support of the Beneficiaries
(b) Preserve Capital: Prioritize using income and new contributions to pay policy premiums; principal shall be depleted only if income proves insufficient
(c) No Mandatory Distribution: No Beneficiary has a right to demand distribution during Grantor's lifetime

5.2 Upon Grantor's Death

Upon Grantor's death, the Trustee shall:

(a) Collect the insurance policy death benefit and any accrued income
(b) Pay, from proceeds, all estate taxes, debts, and administration expenses allocable to the Trust (if estate estate-tax clause directs)
(c) Distribute the remaining proceeds as follows:

5.3 Trustee Authority to Pay Estate Taxes

If Grantor's estate is subject to federal estate tax and the estate's executor requests, the Trustee may pay estate taxes, debts, and administration expenses allocable to insurance proceeds. Any such payment shall be made only from the proceeds of Policies held in this Trust.

ARTICLE VI: SPECIAL PROVISIONS FOR ILIT VALIDITY

6.1 Independent Trustee Requirement

To minimize IRC § 2036/2038 risk, the Trustee should be independent of Grantor, ideally:

• A professional corporate trustee (bank, trust company)
• A family member who is not a spouse or child of Grantor
• Not subject to Grantor's control or influence

If Trustee is a family member, Trustee shall receive written guidance affirming Trustee's independent judgment in all policy and distribution matters.

6.2 No Powers of Appointment (Grantor or Spouse)

Neither Grantor nor Grantor's spouse (whether individual or entity) shall have any power to:

• Designate who receives distributions
• Control investment or management
• Direct the Trustee's actions
• Amend beneficiary provisions

Retention of any such power would cause inclusion under IRC § 2041 (powers of appointment).

6.3 Restriction on Distributions to Grantor

Under no circumstances shall any Trust income or principal be distributed to Grantor. Such a distribution would cause the entire Trust to be included in Grantor's estate.

ARTICLE VII: TAX COMPLIANCE AND REPORTING

7.1 Federal Income Tax Identification

The Trustee shall:

• Obtain an Employer Identification Number (EIN) from the IRS for the Trust
• File Form 1041 (U.S. Fiduciary Income Tax Return) annually if the Trust has gross income
• Furnish Schedule K-1 to Beneficiaries showing allocated income

7.2 Gift Tax Reporting

For each contribution year:

• Grantor's tax return preparer shall report any contributions exceeding the annual exclusion on Form 709 (Gift Tax Return)
• Crummey withdrawal rights and lapses shall be documented and retained for IRS audit defense
• Failure to file Form 709 for taxable gifts may result in audit and penalties

7.3 Grantor Trust Election (INTENTIONAL AVOIDANCE)

The Trustee shall not make a Grantor Trust election under IRC § 671 et seq. if the objective is estate tax exclusion. If this Trust is treated as a grantor trust, the Policy will be included in Grantor's estate. The Trustee's tax advisor should confirm the Trust is NOT a grantor trust.

7.4 Policy Loan and Surrender Tax Issues

If the Trust takes a loan against the policy's cash value or surrenders the policy:

• Gain (excess of loan/surrender proceeds over basis) may be subject to income tax
• The Trustee must report any gain on Form 1041 or Grantor's return (depending on tax treatment)
• Consult with tax counsel before taking policy loans

ARTICLE VIII: AMENDMENTS AND RESTRICTIONS

8.1 No Amendment by Grantor

This Trust is irrevocable. Grantor shall have no power to amend, modify, alter, revoke, or terminate this Trust, or to direct any amendment thereof.

8.2 Trustee Authority to Amend (Limited)

The Trustee may amend administrative provisions (accounting methods, trust situs, Trustee succession) only if:

• Such amendment does not increase the duties or liabilities of the Trustee
• Such amendment does not reduce or eliminate any Beneficiary's interest
• Such amendment is consistent with IRC § 2035–2042 and ILIT principles

No Trustee amendment may restore any power to Grantor.

8.3 Decanting Authority (if applicable)

[Optional] The Trustee may decant (redistribute trust property to a successor or new trust) if:

• The new trust is also irrevocable and provides comparable or greater benefits to Beneficiaries
• No distribution is made to Grantor or Grantor's estate
• Decanting is permitted under [State] law and does not violate grantor-retained interests

ARTICLE IX: TERMINATION

9.1 Trust Termination

This Trust shall terminate:

• Upon the death of the last named Primary Beneficiary, or
• Upon the death of the last living Beneficiary, whichever occurs later, or
• Upon a determination by the Trustee that continued administration is impossible or impractical

9.2 Distribution upon Termination

Upon termination, the Trustee shall:

• Pay all debts, expenses, and taxes
• Distribute remaining Trust property to the then-living Beneficiaries in the proportions set forth in Article V, Section 5.2
• If no Beneficiary survives, distribute to Grantor's estate

9.3 Trustee Final Accounting

Before distribution, the Trustee shall deliver a final accounting to all Beneficiaries and retain copies for seven (7) years.

ARTICLE X: EXECUTION AND ACKNOWLEDGMENT

IN WITNESS WHEREOF, Grantor has executed this Irrevocable Life Insurance Trust Agreement as of the date first written above.

GRANTOR:

Signature: [____________________________]

Print Name: [____________________________]

Date: [__/__/____]

TRUSTEE ACCEPTANCE:

By accepting this appointment, the Trustee agrees to serve as Trustee and to comply with all provisions of this Trust Agreement.

Signature: [____________________________]

Print Name: [____________________________]

Title (if applicable): [____________________________]

Date: [__/__/____]

EIN (once obtained): [____________________________]

NOTARIZATION (Recommended):

State of [__________________]
County of [__________________]

On [__/__/____] before me, [__________________], a notary public, personally appeared [__________________] (Grantor) and [__________________] (Trustee), known to me to be the persons whose names are signed above, and acknowledged that they signed this Irrevocable Life Insurance Trust Agreement freely and voluntarily.

Notary Signature: [____________________________]

Print Name: [____________________________]

Notary Seal: [NOTARY SEAL AREA]

Commission Expires: [__________________]

SOURCES AND REFERENCES

Federal Statutes:

• 26 U.S.C. § 2035 – Adjustments for gifts made within 3 years of death
• 26 U.S.C. § 2036 – Transfers with retained life estate
• 26 U.S.C. § 2038 – Revocable transfers
• 26 U.S.C. § 2042 – Proceeds of life insurance (estate inclusion)
• 26 U.S.C. § 2503 – Annual gift tax exclusion and Crummey powers
• 26 U.S.C. § 2514 – Powers of appointment

Treasury Regulations:

• Treas. Reg. § 20.2042-1 – Life insurance included in gross estate
• Treas. Reg. § 25.2503-3 – Crummey withdrawal right requirements

IRS Forms & Publications:

• Form 706 – U.S. Estate Tax Return
• Form 709 – U.S. Gift Tax Return
• Form 1041 – U.S. Fiduciary Income Tax Return
• Pub. 950 – Introduction to Estate and Gift Taxes

Key Case Law:

• Crummey v. Commissioner, 397 F.2d 82 (9th Cir. 1968) – Withdrawal rights and annual exclusion
• Estate of Headley v. Commissioner, 93 T.C. 171 (1989) – ILIT incidents of ownership
• Rocquest v. Commissioner, 2000-2 USTC ¶ 60,395 – Three-year lookback application

Planning Resources:

• State Bar Association Model Form for Irrevocable Trusts
• Uniform Trust Code (if adopted in your state)
• Local bar association continuing legal education materials on estate planning

IMPLEMENTATION CHECKLIST

☐ Grantor and Trustee execute and notarize the Trust Agreement
☐ Obtain EIN for the Trust from IRS (Form SS-4)
☐ Prepare and file insurance policy assignment (NAIC form or insurer's form)
☐ Provide copy of Trust Agreement to insurance company
☐ File Schedule K-1 for any beneficiary distributions or accumulated income
☐ File Form 709 for any taxable gifts (if contribution exceeds annual exclusion)
☐ Send Crummey notice to beneficiaries within 30 days of each contribution
☐ Maintain copies of all Crummey notices and lapse records
☐ Prepare annual Form 1041 (if Trust has gross income)
☐ Review policy performance annually; consider illustration or replacement
☐ Review Trust deed and beneficiary designations every 3–5 years or after major life event
☐ Confirm Trustee remains independent and willing to serve
☐ At Grantor's death, provide copy of Trust to estate executor and file estate tax return (Form 706) if necessary

DISCLAIMERS & CAUTIONS

Three-Year Lookback: Policies transferred to an ILIT within three years of death remain in the gross estate under IRC § 2035. To achieve full estate tax exclusion, the insured must survive the transfer date by at least three (3) years. There is no waiver of this rule.

Crummey Powers Burden: Strict compliance with Crummey procedures is essential. Failure to send proper notice, follow timelines, or document lapse can invalidate the annual exclusion treatment, creating unexpected gift tax liability.

Grantor Involvement Risk: If Grantor retains any right, power, or incident of ownership in the Policy or Trust, the entire proceeds will be included in the gross estate. This includes:

• Retaining the right to change beneficiaries
• Retaining voting or investment control
• Taking distributions
• Borrowing from the policy without adequate documentation

Policy Lapse Risk: If the Trust's income is insufficient and Grantor cannot fund premiums, the policy may lapse, defeating the planning objective. Annual funding discipline is essential.

State Law Variation: Some states impose perpetual dynasty trust taxes (Generation-Skipping Transfer Tax, IRC § 2601–2663) or trust duration limits. Confirm situs selection with tax counsel.

Not Estate Planning Alone: An ILIT is one tool in comprehensive estate planning. Coordinate with a will, financial power of attorney, healthcare directive, and any other trusts or business succession arrangements.