Irrevocable Life Insurance Trust (ILIT)

DISCLAIMER
This template is provided for general informational purposes only and does not constitute legal advice. No attorney-client relationship is created by your review or use of this document. Colorado trust law is highly fact-specific; practitioners must tailor this form to the particular objectives of the Grantor, the needs of the Beneficiaries, and the most current version of the Colorado Revised Statutes (including the Colorado Uniform Trust Code, C.R.S. §§ 15-5-101 et seq.). An irrevocable life insurance trust also requires careful federal estate, gift, and generation-skipping transfer tax analysis under the Internal Revenue Code. Engage qualified Colorado counsel and tax advisors before finalizing or relying on this instrument.

COLORADO IRREVOCABLE LIFE INSURANCE TRUST (ILIT) AGREEMENT

(Governed by Colorado Trust Law; Exclusive Forum—Colorado State Probate Court)

TABLE OF CONTENTS

I. Document Header & Recitals
II. Definitions
III. Operative Provisions
IV. Representations & Warranties
V. Covenants & Restrictions
VI. Defaults & Remedies
VII. Risk Allocation
VIII. Dispute Resolution
IX. General Provisions
X. Execution Block
Schedule A — Insurance Policies & Initial Trust Property
Exhibit 1 — Crummey Withdrawal Notice (Form)

I. DOCUMENT HEADER & RECITALS

1.1 Parties.
(a) Grantor (Insured): [GRANTOR FULL LEGAL NAME], an individual residing at [ADDRESS]. The Grantor is the insured under the Policies and shall not serve as Trustee.
(b) Trustee: [TRUSTEE FULL LEGAL NAME], [an individual who is not the Grantor, the Grantor's spouse, or a beneficiary / a Colorado trust company], with its principal office at [ADDRESS] (an independent Trustee).
(c) Beneficiaries: The persons or entities identified in Section 3.6 and Schedule A.

1.2 Effective Date. This Agreement is effective as of [EFFECTIVE DATE] (the "Effective Date").

1.3 Creation of Trust. Pursuant to C.R.S. §§ 15-5-401 et seq., Grantor hereby transfers, assigns, and delivers to Trustee the property described on Schedule A (the "Initial Trust Property"), including all right, title, and interest in the life insurance Policies described therein, to hold in trust (the "Trust") for the uses and purposes set forth herein.

1.4 Irrevocability. This Trust is irrevocable. Grantor expressly and irrevocably waives all rights and powers, whether alone or in conjunction with others, to alter, amend, revoke, or terminate this Trust, and surrenders all incidents of ownership in the Policies.

1.5 Purpose. The primary purposes of the Trust are to (a) own life insurance on the Grantor's life so that the death benefit is excluded from the Grantor's gross estate under 26 U.S.C. § 2042; (b) provide liquidity and managed support for the Beneficiaries; and (c) enable annual-exclusion premium gifts through Crummey withdrawal rights under 26 U.S.C. §§ 2503(b) and 2514.

II. DEFINITIONS

For ease of reference, capitalized terms have the following meanings (alphabetically):

"Agreement" means this Colorado Irrevocable Life Insurance Trust Agreement, including all schedules, exhibits, and amendments.

"Applicable Law" means the Colorado Revised Statutes, the Colorado Uniform Trust Code (C.R.S. §§ 15-5-101 et seq.), the Colorado Uniform Prudent Investor Act (C.R.S. §§ 15-1.1-101 et seq.), the Colorado Statutory Rule Against Perpetuities Act (C.R.S. § 15-11-1102.5), relevant federal tax law, and any successor statutes.

"Beneficiary" and "Qualified Beneficiary" have the meanings assigned in C.R.S. §§ 15-5-103(3) & (16).

"Code" means the Internal Revenue Code of 1986, as amended.

"Contribution" means any cash or other property transferred to the Trust, including amounts intended to fund premium payments.

"Crummey Power" means the limited right of withdrawal granted to a Withdrawal Beneficiary under Section 3.7.

"Incidents of Ownership" means, with respect to a Policy, the powers described in Treas. Reg. § 20.2042-1(c), including the power to change the beneficiary, surrender or cancel the Policy, assign or pledge the Policy, or borrow against its cash value.

"Insured" means the Grantor.

"Policy" or "Policies" means each life insurance policy on the life of the Insured held by the Trustee and described on Schedule A, together with any replacement or additional policy acquired by the Trustee.

"Trust Assets" means all property held by Trustee from time to time, including all Policies, proceeds, additions, and accretions.

"Withdrawal Beneficiary" means each Beneficiary granted a Crummey Power under Section 3.7.

III. OPERATIVE PROVISIONS

3.1 Transfer and Acceptance.

Grantor hereby irrevocably transfers the Initial Trust Property to Trustee, and Trustee accepts the property in trust, to be held, managed, and distributed as provided herein. Trustee shall apply for, purchase, or take assignment of the Policies as owner and beneficiary.

3.2 Name of Trust.

The Trust shall be known as "[GRANTOR] Irrevocable Life Insurance Trust dated [EFFECTIVE DATE]" (the "Trust").

3.3 Irrevocability; Limited Modifications.

(a) The Trust may not be revoked by Grantor.
(b) Administrative (non-dispositive) modifications are permitted only:
(i) by unanimous written consent of Trustee and all Qualified Beneficiaries, to the extent authorized under C.R.S. § 15-5-411; or
(ii) by court order under C.R.S. § 15-5-412.
No modification may restore any incident of ownership, beneficial interest, or power to Grantor.

3.4 Funding; Assignment or Purchase of Policies.

(a) Existing Policies. Any Policy transferred by Grantor is assigned to Trustee by absolute assignment recorded with the issuing insurer, and Trustee shall be named owner and beneficiary.
(b) New Policies. Trustee may apply for and purchase new Policies on the Insured's life, as owner and beneficiary, funded by Contributions.
(c) Schedule A shall list each Policy by insurer, policy number, face amount, and date.

3.5 Incidents of Ownership — Critical Restriction (26 U.S.C. § 2042).

Grantor shall retain no Incidents of Ownership in any Policy. The power to change beneficiaries, surrender, assign, pledge, or borrow against any Policy is vested exclusively in the Trustee and shall never be exercisable by, for, or at the direction of the Grantor. Retention of any Incident of Ownership by Grantor would cause the death benefit to be included in Grantor's gross estate.

3.6 Three-Year Rule (26 U.S.C. § 2035).

Grantor acknowledges that if Grantor transfers an existing Policy to the Trust and dies within three (3) years of the transfer, the proceeds may be included in Grantor's gross estate under § 2035(a). Policies originally applied for and purchased by the Trustee are not subject to this lookback.

3.7 Crummey Withdrawal Rights (26 U.S.C. §§ 2503(b), 2514).

(a) Grant of Power. Upon each Contribution, each Withdrawal Beneficiary identified on Schedule A shall have the right to withdraw from the Trust an amount equal to such Beneficiary's pro rata share of the Contribution, not to exceed the annual gift tax exclusion under Code § 2503(b) per donor (or twice that amount for a split gift).
(b) Notice Procedure. The Trustee shall give prompt written notice (substantially in the form of Exhibit 1) to each Withdrawal Beneficiary (or the natural/legal guardian of a minor or incapacitated Beneficiary) describing the Contribution, the withdrawal amount, and the deadline for exercise.
(c) Exercise Period. The withdrawal right is exercisable for a period of [30] days after notice and lapses to the extent not exercised in writing within that period.
(d) Hanging Power. To the extent a Beneficiary's lapsing withdrawal right in any year exceeds the greater of $5,000 or 5% of the Trust corpus (Code § 2514(e)), the excess shall not lapse in that year but shall carry over ("hang") and lapse in succeeding years only as and to the extent it falls within the 5-and-5 limit.
(e) Records. Trustee shall retain copies of all Crummey notices and records of exercise or lapse for the life of the Trust.

3.8 Trustee Insurance Powers.

In addition to the powers in Section 3.10, Trustee may, in a fiduciary capacity: pay premiums from Trust income or Contributions; apply for, accept, and own Policies; exercise nonforfeiture and dividend options; borrow against or pledge a Policy solely for the benefit of the Trust; surrender, exchange (including Code § 1035 exchanges), or replace a Policy; and collect death benefits.

3.9 Distributions.

(a) During the Insured's Lifetime. Trustee shall hold the Trust primarily to maintain the Policies in force, applying income and Contributions to premiums. No Beneficiary may compel distribution except through a Crummey Power.
(b) Upon the Insured's Death. Trustee shall collect the death benefit and, in Trustee's discretion, may (but is not required to) purchase assets from, or lend to, the Insured's estate, or pay estate obligations to the extent the executor requests; no proceeds shall be paid to or for the benefit of the Grantor's estate except as so authorized.
(c) Distribution to Beneficiaries. Trustee shall thereafter hold and distribute the remaining Trust Estate for the health, education, maintenance, and support of the Beneficiaries, and upon the terms (including continuing trusts and ages of distribution), set forth on Schedule A.

3.10 Trustee Powers.

Subject to Applicable Law, Trustee shall have all powers granted under C.R.S. § 15-5-815, including without limitation the power to: invest and reinvest under the Colorado UPIA; buy, sell, or exchange property; borrow and encumber Trust Assets; settle claims; and employ professionals at Trust expense.

3.11 Spendthrift Provision.

To the maximum extent permitted by C.R.S. §§ 15-5-502 & -503, the interest of any Beneficiary shall not be subject to voluntary or involuntary alienation, attachment, or anticipation prior to actual receipt.

3.12 Tax Provisions.

(a) No Inclusion in Grantor's Estate. No power held by any person shall be construed to cause inclusion of the Policies or proceeds in Grantor's gross estate under Code §§ 2035–2042.
(b) GST Allocation. Trustee shall cooperate with Grantor's tax advisors to allocate available GST exemption (Code §§ 2601, 2631) to Contributions where a dynasty term is intended.
(c) Tax Identification. Trustee shall obtain an EIN and file all required federal and Colorado returns.

3.13 Termination; Perpetuities.

(a) Unless terminated earlier under Section 3.3(b), the Trust shall continue for the maximum period permitted by C.R.S. § 15-11-1102.5, under which a nonvested interest is valid if it vests or terminates within one thousand (1,000) years after its creation, permitting a Colorado dynasty term.
(b) Alternatively, if the Grantor elects a measuring-lives savings clause, the Trust shall terminate 21 years after the death of the last surviving descendant of [REFERENCE PERSON] living on the Effective Date.
(c) Upon termination, Trustee shall distribute the remaining Trust Assets to the then-living Remainder Beneficiaries, per stirpes, free of trust.

IV. REPRESENTATIONS & WARRANTIES

4.1 Grantor.

(a) Legal capacity to create this Trust and to transfer the Initial Trust Property (including the Policies) free of undisclosed encumbrances.
(b) No present intent to defraud creditors, and no pending litigation or creditor claims that would impair transfer.

4.2 Trustee.

(a) Possesses requisite fiduciary capacity and, if an entity, is duly organized, validly existing, and in good standing.
(b) Is independent of Grantor and will administer the Trust in strict accordance with this Agreement and Applicable Law, retaining no Incident of Ownership for Grantor's benefit.

4.3 Survival.

All representations and warranties survive execution and remain in effect until final distribution.

V. COVENANTS & RESTRICTIONS

5.1 Trustee Covenants.

(a) Maintain the Policies in force to the extent funded; monitor premium due dates and Policy performance.
(b) Send timely Crummey notices and maintain complete records.
(c) Segregate Trust Assets and maintain accurate books.

5.2 Negative Covenants.

Trustee shall not:
(a) permit Grantor to exercise or direct any Incident of Ownership;
(b) distribute income or principal to or for the benefit of Grantor;
(c) engage in self-dealing except as permitted under C.R.S. § 15-5-802.

5.3 Notice & Cure.

Upon discovering any breach, Trustee shall promptly notify Qualified Beneficiaries and take corrective action within [30] days.

VI. DEFAULTS & REMEDIES

6.1 Events of Default.

(a) Trustee's material breach of fiduciary duty, including failure to maintain a Policy or send Crummey notices.
(b) Trustee's insolvency or resignation without qualified successor.
(c) Judicial determination of Trustee's incapacity or misconduct.

6.2 Remedies.

(a) Removal and replacement of Trustee pursuant to C.R.S. § 15-5-706.
(b) Surcharge against Trustee's compensation.
(c) Injunctive relief or specific performance in the state probate court of [COUNTY], Colorado.
(d) Recovery of reasonable attorneys' fees and costs by the prevailing party.

VII. RISK ALLOCATION

7.1 Indemnification of Trustee.

(a) The Trust shall indemnify, defend, and hold Trustee harmless against any claim, liability, or expense arising from administration of the Trust, except to the extent resulting from Trustee's gross negligence, willful misconduct, or bad faith.
(b) Indemnification is limited exclusively to Trust Assets; no Beneficiary or Grantor shall have personal liability.

7.2 Limitation of Liability.

Trustee's total aggregate liability shall not exceed the value of the Trust Assets under Trustee's control at the time the liability is determined.

7.3 Insurance.

Trustee may maintain fiduciary liability insurance, the premiums of which shall be paid from Trust Assets.

7.4 Force Majeure.

Trustee shall not be liable for failure to perform caused by events beyond its reasonable control.

VIII. DISPUTE RESOLUTION

8.1 Governing Law.

This Agreement and the Trust are governed by the laws of the State of Colorado, without regard to conflict-of-laws principles.

8.2 Forum Selection.

The parties submit exclusively to the jurisdiction of the state probate court of [COUNTY], Colorado for all proceedings concerning the Trust, subject to Section 8.3.

8.3 Optional Arbitration.

☐ Not Applicable.
☐ Arbitration: Any dispute not resolved within 60 days shall be submitted to binding arbitration administered by the American Arbitration Association in [CITY], Colorado. Judgment on the award may be entered in the designated probate court. Nothing herein limits the court's supervisory jurisdiction under C.R.S. § 15-5-201.

8.4 Jury Waiver.

No jury trial is available in probate matters under Colorado law; any right thereto is expressly waived.

8.5 Injunctive Relief.

Nothing in this Article limits the right of any party to seek provisional or injunctive relief to protect Trust Assets or enforce fiduciary duties.

IX. GENERAL PROVISIONS

9.1 Amendments.

Except as permitted in Section 3.3, this Agreement may be amended only by (i) written instrument executed by Trustee and all Qualified Beneficiaries, and (ii) approval of the probate court if required. No amendment may benefit Grantor.

9.2 Trustee Succession.

The initial Trustee is [TRUSTEE NAME]. If the Trustee dies, resigns, is removed, or becomes incapacitated, the successor Trustee shall be [SUCCESSOR TRUSTEE]. If none is available, a majority of the Qualified Beneficiaries (or the probate court) shall appoint an independent successor Trustee who is not the Grantor, the Grantor's spouse, or a related or subordinate party within Code § 672(c).

9.3 Severability.

If any provision is held unenforceable, the remaining provisions shall remain in full force, and the court may reform the Agreement to effectuate its purposes.

9.4 Integration.

This Agreement constitutes the entire understanding and supersedes all prior agreements concerning the subject matter.

9.5 Counterparts; Electronic Signatures.

This Agreement may be executed in counterparts, each deemed an original, and delivered by electronic means with the same force as an ink-signed original.

X. EXECUTION BLOCK

IN WITNESS WHEREOF, the parties execute this Colorado Irrevocable Life Insurance Trust Agreement as of the Effective Date.

TRUSTEE ACCEPTANCE

The undersigned accepts the trusteeship of the above-named Trust, acknowledges receipt of the Initial Trust Property, and agrees to administer the Trust in accordance with this Agreement and Colorado law.

Signature: [____________________________] Date: [__/__/____]

EIN (once obtained): [____________________________]

NOTARIZATION

State of Colorado )
County of [________________] ) ss.

Acknowledged before me on [__/__/____] by [____________________________] as Grantor and by [____________________________] as Trustee.

[____________________________]
Notary Public
My commission expires: [________________]

SCHEDULE A – INSURANCE POLICIES & INITIAL TRUST PROPERTY

Life Insurance Policies:

Other Initial Trust Property:

1. $[CASH AMOUNT] in cash for initial premium.
2. [Other property, if any].

Withdrawal Beneficiaries (Crummey):

Dispositive Terms at Insured's Death:

EXHIBIT 1 – CRUMMEY WITHDRAWAL NOTICE (FORM)

[__/__/____]

To: [WITHDRAWAL BENEFICIARY / GUARDIAN OF MINOR BENEFICIARY]
Re: [GRANTOR] Irrevocable Life Insurance Trust dated [EFFECTIVE DATE]

Dear [________________]:

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

Under the Trust Agreement, you have the right to withdraw your pro rata share of this contribution, in an amount up to $[____________], by delivering a written demand to the Trustee at the address below.

Your withdrawal right will lapse if not exercised in writing on or before [__/__/____] (the [30th] day after the date of this notice). To the extent any portion of your right exceeds the greater of $5,000 or 5% of the Trust corpus, that excess will not lapse this year and will carry over as provided in the Trust Agreement.

If you do not wish to withdraw, you need do nothing and your right will lapse.

Trustee: [____________________________]
Address: [____________________________]

☐ I, [BENEFICIARY], decline to exercise my withdrawal right for this contribution.

Beneficiary Signature: [____________________________] Date: [__/__/____]

SOURCES AND REFERENCES

• Colorado Uniform Trust Code, C.R.S. §§ 15-5-101 et seq. — https://leg.colorado.gov/
• C.R.S. § 15-11-1102.5 (Statutory Rule Against Perpetuities — 1,000-year period) — https://law.justia.com/codes/colorado/title-15/colorado-probate-code/article-11/part-11/section-15-11-1102-5/
• C.R.S. §§ 15-5-502 & 15-5-503 (Spendthrift)
• C.R.S. § 15-5-815 (Trustee powers)
• C.R.S. § 10-7-106 (Exclusive right of insured in retained proceeds) — https://codes.findlaw.com/co/title-10-insurance/co-rev-st-sect-10-7-106/
• C.R.S. § 13-54-102(1)(l) (Exemption of life insurance)
• 26 U.S.C. § 2042; § 2035; §§ 2503(b), 2514; §§ 2601, 2631 — https://www.law.cornell.edu/uscode/text/26
• Treas. Reg. § 20.2042-1; Treas. Reg. § 25.2503-3
• Crummey v. Commissioner, 397 F.2d 82 (9th Cir. 1968)

Note on Colorado state death tax: Colorado imposes no state estate or inheritance tax. Planning focuses on federal estate, gift, and GST tax.