Irrevocable Life Insurance Trust (ILIT)

IRREVOCABLE LIFE INSURANCE TRUST (ILIT) AGREEMENT

(State of Arizona)

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 at any time. To preserve the estate-tax exclusion under IRC § 2042 and 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).

1.4 Recitals.
WHEREAS, the Grantor desires to create an irrevocable trust under the Arizona Trust Code, A.R.S. §§ 14-10101 et seq., to own one or more policies of insurance on the Grantor's life; and
WHEREAS, the Grantor intends that the proceeds be excluded from the Grantor's gross estate 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 creates this Trust and transfers the property described in Exhibit A to the Trustee, in trust, on the terms below.

ARTICLE II — DEFINITIONS

"AZTC" — The Arizona Trust Code, A.R.S. §§ 14-10101 et seq.

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

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

"Independent Trustee" — A Trustee who is neither the Grantor, the Grantor's spouse, nor a permissible distributee, and who is not related or subordinate to the Grantor within IRC § 672(c).

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

"Trust Estate" — All property held under this Agreement, including the Policy and its proceeds.

2.3 Beneficiaries.

Contingent / remainder beneficiaries: [________________________________]

ARTICLE III — IRREVOCABILITY

3.1 Irrevocable. This Trust is irrevocable. The Grantor waives all right to alter, amend, revoke, or terminate this Trust. Under A.R.S. § 14-10602, a trust is revocable only if its terms expressly so provide; this Trust is not.

3.2 No Retained Interest. No income or principal shall be distributed to or for the benefit of the Grantor, and no provision shall discharge any legal obligation of the Grantor.

3.3 Void Attempts. Any attempted revocation or amendment by the Grantor, other than as permitted by Article XI or by a court under A.R.S. §§ 14-10410 through 14-10416, 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 Policy and/or initial seed 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. Best practice: the Trustee should apply for and purchase a new Policy directly so the Grantor never holds incidents of ownership and the IRC § 2035 three-year rule 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 to the Trustee and shall file it with the insurer.

4.4 Schedule. Exhibit A shall be updated for 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, including the power to change the beneficiary, surrender or cancel the Policy, borrow against or pledge the Policy, or assign or revoke an assignment. All such powers vest solely in the Trustee.

5.2 Three-Year Lookback (IRC § 2035). If an existing Policy is transferred to this Trust and the Grantor dies within three (3) years, the proceeds may be included in the Grantor's gross estate under IRC § 2035(a). A Policy 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, retain a reversionary interest, or retain any power under IRC §§ 2036, 2038, or 2041 causing estate inclusion.

ARTICLE VI — CONTRIBUTIONS AND PREMIUM PAYMENTS

6.1 Additions. The Grantor or any other person may contribute cash to enable the Trustee to pay premiums. 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, and is not personally liable for premiums.

6.3 Crummey Procedure. Before or promptly after each contribution, the Trustee shall give written Crummey notice (Article VII) and shall hold the contribution available for withdrawal during the withdrawal period before committing it to premiums.

ARTICLE VII — CRUMMEY WITHDRAWAL RIGHTS

7.1 Present-Interest Gifts (IRC § 2503(b)). Each Beneficiary in Section 2.3 with a Crummey Power may withdraw a portion of each contribution so the gift qualifies for the annual gift tax exclusion.

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

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

7.4 Withdrawal Period. The right must be exercised in writing within [30] days after notice; an unexercised right lapses.

7.5 5-and-5 Limit; Hanging Power. To avoid a taxable lapse under IRC §§ 2041 and 2514, the lapse in any year is limited to the greater of $5,000 or 5% of the assets from which the withdrawal could have been satisfied. Any excess withdrawal right shall not lapse but shall carry forward ("hang") and lapse in later years only within the 5-and-5 limit.

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

ARTICLE VIII — TRUSTEE POWERS REGARDING INSURANCE

8.1 General Powers. The Trustee has all powers under A.R.S. §§ 14-10815 and 14-10816 and the Arizona Prudent Investor Act, together with the specific insurance powers below. The Trustee is expressly granted the power to sell Trust property (relevant to the perpetuities treatment under A.R.S. § 14-2901(A)(3); see Article XI).

8.2 Insurance Powers. The Trustee may, in sole discretion: apply for, purchase, own, and hold Policies on the Grantor's life; pay premiums; receive and elect dividends; 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; and exercise every owner's right.

8.3 No Duty to Diversify. The Trustee may hold a single Policy as the principal asset and has no duty to determine whether a Policy is or remains a proper investment.

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

ARTICLE IX — DISTRIBUTIONS

9.1 During the Grantor's Life. The Trustee shall hold the Trust Estate, pay premiums, and (after retaining sufficient premium funds) may distribute income or principal to or among the Beneficiaries (other than the Grantor) under a HEMS standard, in the Trustee's discretion. No distribution shall be made to or for the Grantor.

9.2 Upon the Grantor's Death. The Trustee shall collect the Policy proceeds, hold them as a separate fund, and distribute the Trust Estate to and among the Beneficiaries as set forth in Exhibit A, outright or in further trust.

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 to provide liquidity. No mandatory direction to pay the Grantor's taxes or debts is created.

ARTICLE X — SPENDTHRIFT PROTECTION

10.1 Spendthrift Clause. Each Beneficiary's interest is held subject to a spendthrift restriction under A.R.S. § 14-10502, which restrains both voluntary and involuntary transfer of a Beneficiary's interest. No Beneficiary may transfer any interest before receipt, and no creditor or assignee may reach the interest before the Beneficiary receives it.

10.2 Insurance Proceeds Creditor Exemption. The Grantor intends that the Policy proceeds, payable to the Trustee for beneficiaries other than the Grantor, qualify for the protections of A.R.S. § 20-1131, which entitles a lawful beneficiary or third person (other than the person effecting the insurance or that person's legal representative) to the policy's proceeds against the creditors and representatives of the person effecting the insurance. Arizona courts have held that life insurance proceeds paid to a trust created by the insured, in which the beneficiary is a third party, are protected from the creditors of the insured's estate. In re Estate of King, 228 Ariz. 565 (2012).

ARTICLE XI — PERPETUITIES AND TERMINATION

11.1 Power-of-Sale Exception. Because the Trustee holds the power to sell Trust assets (Section 8.1) and one or more persons living when the Trust is created may hold an unlimited power to terminate, the common-law rule against perpetuities does not invalidate the Trust's nonvested interests under A.R.S. § 14-2901(A)(3). The Trust may therefore continue for an extended term consistent with Arizona law.

11.2 Termination Election. The Grantor elects (choose one):
☐ This Trust shall continue for the maximum period permitted under A.R.S. § 14-2901, the Trustee holding 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 permitted by A.R.S. § 14-2901; 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 Arizona intestacy law.

ARTICLE XII — GENERATION-SKIPPING TRANSFER (GST) PROVISIONS

12.1 GST Intent. Where the Trust benefits grandchildren or more remote descendants, the Grantor intends to allocate GST exemption under IRC §§ 2631 and 2632 so the Trust has an inclusion ratio of zero.

12.2 Allocation. The Grantor (or executor) shall allocate available GST exemption on a timely filed Form 709 (or Form 706) to each contribution. The Trustee shall provide values necessary for allocation.

12.3 Separate Trusts. The Trustee may divide the Trust into separate trusts by inclusion ratio to optimize GST treatment without altering dispositive terms.

ARTICLE XIII — TRUSTEE SUCCESSION

13.1 Successor Trustee. If the Initial Trustee resigns, dies, or cannot serve, the successor shall be [SUCCESSOR TRUSTEE NAME]. If no named successor will serve, a successor (an Independent Trustee) shall be appointed by a majority of adult Beneficiaries or by a court.

13.2 Grantor Removal Power Limited. The Grantor shall have no power to remove a Trustee and appoint himself/herself or a related or subordinate party. Any reserved removal power is limited to replacing a Trustee with an Independent Trustee 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 Arizona, including the AZTC, 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 and shall report to qualified beneficiaries under A.R.S. § 14-10813.

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.

14.5 No Grantor Estate Tax Direction. Nothing herein shall require the Trust to pay the Grantor's estate taxes or debts in a manner causing 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 Arizona )
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

Arizona Statutes and Case Law:

• A.R.S. §§ 14-10101 et seq. — Arizona Trust Code — https://www.azleg.gov/arsDetail/?title=14
• A.R.S. § 14-10502 — Spendthrift provision — https://az.elaws.us/ars/14-10502
• A.R.S. § 14-10602 — Revocation or amendment of trust
• A.R.S. § 14-2901 — Statutory rule against perpetuities (power-of-sale exception, § 14-2901(A)(3))
• A.R.S. § 20-1131 — Exemption of life insurance proceeds and cash values from creditors — https://www.azleg.gov/ars/20/01131.htm
• In re Estate of King, 228 Ariz. 565 (2012) — proceeds paid to insured's trust with third-party beneficiary protected from estate creditors

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
• Crummey v. Commissioner, 397 F.2d 82 (9th Cir. 1968)
• Rev. Rul. 95-58 (grantor's limited trustee-removal power)

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