Irrevocable Life Insurance Trust (ILIT)

IRREVOCABLE LIFE INSURANCE TRUST (ILIT) AGREEMENT

(Alabama Law Governed)

TABLE OF CONTENTS

I. Trust Name and Parties
II. Definitions
III. Irrevocability
IV. Funding — Life Insurance Policy
V. No Incidents of Ownership; Three-Year Rule
VI. Contributions and Premium Payments
VII. Crummey Withdrawal Rights
VIII. Trustee Powers Regarding Insurance
IX. Distributions
X. Spendthrift Protection
XI. Perpetuities and Termination
XII. Generation-Skipping Transfer (GST) Provisions
XIII. Trustee Succession
XIV. Governing Law and General Provisions
XV. Execution
Exhibit A — Schedule of Life Insurance Policies
Exhibit B — Crummey Notice Letter

ARTICLE I — TRUST NAME AND PARTIES

1.1 Name. This trust shall be known as the "[GRANTOR NAME] Irrevocable Life Insurance Trust" dated [__/__/____] (the "Trust").

1.2 Parties.

1.3 Grantor Must Not Serve as Trustee. The Grantor shall NOT serve as Trustee of this Trust at any time. To preserve the estate-tax exclusion under IRC § 2042 and to avoid inclusion under IRC §§ 2036 and 2038, the Trustee shall be an independent person or entity (a corporate fiduciary, or an adult who is not the Grantor and, preferably, not a beneficiary or the Grantor's spouse). The Grantor retains no power to direct, control, or remove the Trustee except as expressly and permissibly stated in Article XIII.

1.4 Recitals.
WHEREAS, the Grantor desires to create an irrevocable trust under the Alabama Uniform Trust Code, Ala. Code §§ 19-3B-101 et seq., to own one or more policies of insurance on the Grantor's life; and
WHEREAS, the Grantor intends that the proceeds of such policies be excluded from the Grantor's gross estate for federal estate tax purposes under IRC § 2042; and
WHEREAS, the Trustee is willing to hold, administer, and distribute the Trust property under the terms of this Agreement and applicable law;
NOW, THEREFORE, the Grantor hereby creates this Trust and transfers the property described in Exhibit A to the Trustee, in trust, on the terms below.

ARTICLE II — DEFINITIONS

"AL UTC" — The Alabama Uniform Trust Code, Ala. Code §§ 19-3B-101 et seq.

"Crummey Power" — The limited right of withdrawal granted to a Beneficiary under Article VII.

"Grantor" / "Insured" — [GRANTOR NAME], the person whose life is insured under the Policy.

"Independent Trustee" — A Trustee who is neither the Grantor, the Grantor's spouse, nor a person who may receive distributions from the Trust, and who is not related or subordinate to the Grantor within the meaning of IRC § 672(c).

"Policy" — Each life insurance policy on the Grantor's life held by the Trust, as described in Exhibit A, and any replacement, additional, or substitute policy.

"Trust Estate" — All property held under this Agreement, including the Policy, policy proceeds, and all accretions and reinvestments.

2.3 Beneficiaries.

Contingent / remainder beneficiaries: [________________________________]

ARTICLE III — IRREVOCABILITY

3.1 Irrevocable. This Trust is irrevocable. The Grantor expressly waives and relinquishes all right to alter, amend, revoke, or terminate this Trust in whole or in part. Ala. Code § 19-3B-602(a) (a trust is revocable only if its terms expressly so provide; this Trust is not).

3.2 No Retained Interest. The Grantor retains no beneficial interest in the Trust. No income or principal shall be distributed to the Grantor or applied for the Grantor's benefit, and no provision of this Agreement shall be construed to discharge any legal obligation of the Grantor.

3.3 Void Attempts. Any attempted revocation, amendment, or modification by the Grantor, other than as permitted by Article XI or by a court under Ala. Code §§ 19-3B-410 through 19-3B-416, shall be void.

ARTICLE IV — FUNDING; LIFE INSURANCE POLICY

4.1 Initial Funding. The Grantor transfers to the Trustee the property listed in Exhibit A, which may include an existing life insurance policy and/or initial cash to enable the Trustee to apply for and purchase a new policy.

4.2 Trustee as Owner and Beneficiary. The Trustee shall be both the owner and the beneficiary of each Policy. The application for any new Policy shall be made by the Trustee in the Trustee's name as owner. Best practice: Whenever feasible, the Trustee should apply for and purchase a new Policy directly, so that the Grantor never holds incidents of ownership and the three-year rule of IRC § 2035 (Article V) is avoided.

4.3 Assignment of Existing Policy. If an existing Policy is contributed, the Grantor shall execute an absolute assignment on the insurer's form transferring all right, title, and interest in the Policy to the Trustee, and shall promptly file it with the insurer. The Grantor shall sign all documents the insurer requires to change ownership and beneficiary to the Trustee.

4.4 Schedule. Exhibit A shall be updated to reflect each Policy acquired, assigned, or replaced.

ARTICLE V — NO INCIDENTS OF OWNERSHIP; THREE-YEAR RULE

5.1 No Incidents of Ownership in Grantor (IRC § 2042). Neither the Grantor nor the Grantor's spouse shall hold or exercise any "incident of ownership" in any Policy. Incidents of ownership include, without limitation, the power to change the beneficiary, to surrender or cancel the Policy, to borrow against the Policy or pledge it for a loan, to assign the Policy, or to revoke an assignment. All such powers are vested solely in the Trustee, subject to this Agreement.

5.2 Three-Year Lookback (IRC § 2035). The Grantor acknowledges that if an existing Policy is transferred to this Trust and the Grantor dies within three (3) years of the transfer, the proceeds may be pulled back into the Grantor's gross estate under IRC § 2035(a). A Policy newly applied for, purchased, and owned by the Trustee from inception is not subject to this lookback.

5.3 No Prohibited Powers. The Grantor shall not serve as Trustee, shall not retain any reversionary interest, and shall not retain any power described in IRC §§ 2036, 2038, or 2041 that would cause estate inclusion.

ARTICLE VI — CONTRIBUTIONS AND PREMIUM PAYMENTS

6.1 Additions. The Grantor (or any other person) may contribute cash to the Trust to enable the Trustee to pay premiums. No person is obligated to contribute. Contributions are gifts and become part of the Trust Estate.

6.2 Premium Payments. The Trustee shall apply contributions and Trust income to pay Policy premiums when due. The Trustee is not personally liable for premiums and may allow a Policy to lapse if Trust funds are insufficient, after giving notice to the beneficiaries where practicable.

6.3 Notice and Crummey Procedure. Before or promptly after each contribution, the Trustee shall provide written Crummey notice under Article VII. The Trustee shall hold each contribution available for withdrawal during the withdrawal period and shall not commit contributed funds to premium payment until the withdrawal rights have lapsed or been waived.

ARTICLE VII — CRUMMEY WITHDRAWAL RIGHTS

7.1 Present-Interest Gifts (IRC § 2503(b)). To qualify contributions as present-interest gifts eligible for the annual gift tax exclusion, each Beneficiary designated in Section 2.3 with a Crummey Power shall have the right to withdraw a portion of each contribution.

7.2 Amount. Each holder of a Crummey Power may withdraw the lesser of (a) the holder's pro-rata share of the contribution, or (b) the federal annual gift tax exclusion amount per donor in effect under IRC § 2503(b) for the calendar year (as adjusted for inflation).

7.3 Notice. The Trustee shall give written notice (substantially in the form of Exhibit B) to each holder (or the parent/guardian of a minor holder) within a reasonable time after each contribution, stating the amount contributed, the maximum withdrawable amount, and the deadline to exercise.

7.4 Withdrawal Period. A withdrawal right must be exercised in writing delivered to the Trustee within [30] days after notice. A right not exercised within the period lapses.

7.5 5-and-5 Limit; Hanging Power. To avoid a taxable lapse under IRC §§ 2041 and 2514, the lapse of a withdrawal right in any year shall be limited to the greater of $5,000 or 5% of the value of the Trust assets out of which the withdrawal could have been satisfied. Any withdrawal right that would otherwise lapse in excess of that "5-and-5" amount shall not lapse but shall carry forward ("hang") and lapse in later years only to the extent it does not exceed the 5-and-5 limit for that year.

7.6 Records. The Trustee shall retain copies of all Crummey notices and proof of delivery, and shall document each exercise or lapse.

ARTICLE VIII — TRUSTEE POWERS REGARDING INSURANCE

8.1 General Powers. The Trustee has all powers granted under Ala. Code §§ 19-3B-815 and 19-3B-816 and the Alabama Prudent Investor Act, together with the specific insurance powers below.

8.2 Insurance Powers. The Trustee may, in the Trustee's sole discretion: apply for, purchase, own, and hold one or more Policies on the Grantor's life; pay premiums from Trust funds; receive dividends and elect dividend options; exercise nonforfeiture options; borrow against or pledge a Policy for Trust purposes only; surrender, exchange (including a tax-free exchange under IRC § 1035), or replace a Policy; collect proceeds at maturity or the Grantor's death; and exercise every right and option of an owner.

8.3 No Duty to Diversify or to Pay Premiums Personally. The Trustee may hold a single Policy as the principal Trust asset notwithstanding any duty to diversify, and shall have no duty to determine whether any Policy is or remains a proper investment. The Trustee has no duty to pay premiums except from available Trust funds.

8.4 Tax Administration. The Trustee shall obtain a separate taxpayer identification number for the Trust, file required fiduciary returns, and administer the Trust as a non-grantor trust unless the Grantor's tax advisor confirms grantor-trust treatment is intended for income-tax purposes without causing estate inclusion.

ARTICLE IX — DISTRIBUTIONS

9.1 During the Grantor's Life. During the Grantor's lifetime, the Trustee shall hold the Trust Estate, pay premiums, and (subject to retaining sufficient funds for premiums) may distribute income or principal to or among the Beneficiaries other than the Grantor for their health, education, maintenance, and support (the "HEMS" standard), in the Trustee's discretion. No distribution shall be made to or for the benefit of the Grantor.

9.2 Upon the Grantor's Death. Upon the Grantor's death, the Trustee shall collect the Policy proceeds and shall:
(a) hold and administer the proceeds as a separate fund; and
(b) distribute the Trust Estate to and among the Beneficiaries as set forth in Exhibit A, outright or in further trust as specified.

9.3 Liquidity for the Estate (Discretionary). The Trustee may, but is not directed or required to, purchase assets from or lend funds to the Grantor's estate, or otherwise make proceeds available to provide estate liquidity. The Trustee shall not be required to pay the Grantor's debts, taxes, or expenses, as a mandatory direction could cause estate inclusion.

ARTICLE X — SPENDTHRIFT PROTECTION

10.1 Spendthrift Clause. Each Beneficiary's interest is held subject to a spendthrift restriction under Ala. Code § 19-3B-502. No Beneficiary may voluntarily or involuntarily transfer, assign, pledge, or encumber any interest in the Trust before actual receipt, and no creditor or assignee of a Beneficiary may reach a Beneficiary's interest or a distribution before the Beneficiary receives it.

10.2 Insurance Proceeds Creditor Exemption. The Grantor intends that the Policy proceeds, payable to the Trustee for the benefit of beneficiaries other than the Grantor, qualify for the protections of Ala. Code § 27-14-29 and Ala. Code § 6-10-8, which entitle a lawful beneficiary (other than the insured or the person effecting the insurance) to a policy's proceeds and avails — including death benefits, cash surrender and loan values, premiums waived, and dividends — against the creditors and representatives of the insured and of the person effecting the insurance.

ARTICLE XI — PERPETUITIES AND TERMINATION

11.1 Maximum Duration. No interest under this Trust shall vest later than permitted by the Alabama Uniform Statutory Rule Against Perpetuities, Ala. Code §§ 35-4A-1 et seq. Alabama permits a trust that, by its terms, does not exceed 360 years in duration, is governed by Alabama law, and grants the trustee power to sell, lease, and mortgage trust property to be excluded from the statutory rule. Ala. Code § 35-4A-5(9).

11.2 Dynasty Term Election. The Grantor elects (choose one):
☐ This Trust shall continue for the maximum period of 360 years permitted under Ala. Code § 35-4A-5(9) as a dynasty trust, the Trustee being expressly granted the power to sell, lease, and mortgage all Trust property.
☐ This Trust shall terminate upon [________________________________].

11.3 Savings Clause. Notwithstanding any other provision, every interest under this Trust shall vest, if at all, no later than the maximum period allowed by Ala. Code §§ 35-4A-1 et seq.; any interest not then vested shall vest in the persons then entitled to income.

11.4 Distribution on Termination. On termination, the Trustee shall pay expenses and distribute the remaining Trust Estate to the then-living Beneficiaries as provided in Exhibit A, or if none, to the Grantor's heirs determined under Alabama intestacy law.

ARTICLE XII — GENERATION-SKIPPING TRANSFER (GST) PROVISIONS

12.1 GST Intent. If this Trust is intended to benefit grandchildren or more remote descendants, the Grantor intends to allocate GST exemption under IRC §§ 2631 and 2632 to contributions so that the Trust has an inclusion ratio of zero.

12.2 Allocation. The Grantor (or the Grantor's executor) shall allocate available GST exemption on a timely filed Form 709 (or Form 706) to each contribution to the Trust. The Trustee shall cooperate by providing the values necessary for allocation.

12.3 Separate Trusts. The Trustee may divide the Trust into separate trusts (for example, by inclusion ratio) to optimize GST treatment, provided the dispositive terms are not altered.

ARTICLE XIII — TRUSTEE SUCCESSION

13.1 Successor Trustee. If the Initial Trustee resigns, dies, or becomes unable to serve, the successor Trustee shall be [SUCCESSOR TRUSTEE NAME]. If no named successor will serve, a successor (which should be an Independent Trustee) shall be appointed by a majority of the adult Beneficiaries, or, failing agreement, by a court of competent jurisdiction.

13.2 Grantor Removal Power Limited. The Grantor shall have no power to remove a Trustee and appoint himself or herself or a related or subordinate party. Any reserved removal power shall be limited to removing a Trustee and replacing the Trustee with an Independent Trustee who is not related or subordinate to the Grantor within IRC § 672(c), consistent with Rev. Rul. 95-58.

13.3 Acceptance and Bond. A successor Trustee shall accept in writing and shall have all powers granted herein. No bond shall be required unless ordered by a court.

ARTICLE XIV — GOVERNING LAW AND GENERAL PROVISIONS

14.1 Governing Law. This Trust is governed by and construed under the laws of the State of Alabama, including the AL UTC, without regard to conflict-of-law principles.

14.2 Trustee Duties and Reporting. The Trustee shall administer the Trust in good faith and solely in the Beneficiaries' interests (Ala. Code § 19-3B-801) and shall provide reports to the qualified beneficiaries under Ala. Code § 19-3B-813.

14.3 Severability. If any provision is held invalid, the remainder shall remain in effect.

14.4 Counterparts; Electronic Signatures. This Agreement may be executed in counterparts and by electronic signature. Ala. Code § 8-1A-7.

14.5 No Grantor Estate Tax Direction. Nothing herein shall be construed to require the Trust to pay the Grantor's estate taxes or debts in a manner that would cause inclusion of Policy proceeds in the Grantor's gross estate.

ARTICLE XV — EXECUTION

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

ACKNOWLEDGMENT

State of Alabama )
County of [COUNTY] )

On this ____ day of __________, 20__, before me, a Notary Public in and for said State, personally appeared [GRANTOR NAME] and [INITIAL TRUSTEE NAME], known to me (or satisfactorily proven) to be the persons whose names are subscribed to the within instrument, and acknowledged that they executed the same for the purposes therein contained.

Seal
__________________________________
Notary Public
My Commission Expires: ___________

EXHIBIT A — SCHEDULE OF LIFE INSURANCE POLICIES AND DISTRIBUTION

Policies held by the Trust:

Other initial property (e.g., seed cash): $[__________]

Distribution scheme upon the Grantor's death:

EXHIBIT B — CRUMMEY NOTICE LETTER

[TRUSTEE NAME], Trustee
[TRUST NAME]
[ADDRESS]

Date: [__/__/____]

To: [BENEFICIARY NAME] (or [PARENT/GUARDIAN] on behalf of [MINOR BENEFICIARY])
[ADDRESS]

Re: Right of Withdrawal — [GRANTOR NAME] Irrevocable Life Insurance Trust

Dear [BENEFICIARY NAME]:

As Trustee of the above Trust, I am notifying you that on [__/__/____] a contribution of $[__________] was made to the Trust.

Under the Trust Agreement, you have the right to withdraw from this contribution an amount equal to the lesser of (a) your pro-rata share of the contribution, or (b) the federal annual gift tax exclusion amount in effect for this year. Your maximum withdrawable amount for this contribution is $[__________].

To exercise this right, you must deliver a written request to me at the address above on or before [__/__/____] (the deadline, which is [30] days after the date of this notice). If I do not receive your written request by that date, your right to withdraw this contribution will lapse, and the funds will remain in the Trust.

You are not required to exercise this right. This notice is given to protect the tax treatment of the contribution.

Sincerely,

__________________________________
[TRUSTEE NAME], Trustee

Acknowledgment of Receipt (optional):
I acknowledge receiving this notice on [__/__/____].
Signature: [____________________________] ☐ I waive my withdrawal right ☐ I exercise my withdrawal right

SOURCES AND REFERENCES

Alabama Statutes:

• Ala. Code §§ 19-3B-101 et seq. — Alabama Uniform Trust Code — https://law.justia.com/codes/alabama/title-19/chapter-3b/
• Ala. Code § 19-3B-502 — Spendthrift provision
• Ala. Code § 19-3B-602 — Revocation or amendment
• Ala. Code §§ 35-4A-1 et seq. — Alabama Uniform Statutory Rule Against Perpetuities (100-year period; 360-year dynasty exclusion, § 35-4A-5(9)) — https://law.justia.com/codes/alabama/title-35/chapter-4a/
• Ala. Code § 27-14-29 — Rights of beneficiaries under life insurance policies against creditors — https://law.justia.com/codes/alabama/title-27/chapter-14/section-27-14-29/
• Ala. Code § 6-10-8 — Exemption of life insurance proceeds and avails

Federal Authority:

• 26 U.S.C. § 2042 — Proceeds of life insurance
• 26 U.S.C. § 2035 — Gifts within 3 years of death
• 26 U.S.C. §§ 2503(b)-(c) — Annual gift tax exclusion
• 26 U.S.C. § 2514 — Powers of appointment (5-and-5)
• 26 U.S.C. §§ 2601-2631 — Generation-skipping transfer tax
• Treas. Reg. § 20.2042-1 — Life insurance in gross estate
• Crummey v. Commissioner, 397 F.2d 82 (9th Cir. 1968)
• Rev. Rul. 95-58 (grantor's limited trustee-removal power)

State Tax Note: Alabama imposes no state estate tax and no state inheritance tax. Federal estate/GST tax may still apply to large estates.