Irrevocable Life Insurance Trust (ILIT)

IRREVOCABLE LIFE INSURANCE TRUST (ILIT) AGREEMENT

(Connecticut – Draft Template)

TABLE OF CONTENTS

I. Document Header
II. Definitions
III. Operative Provisions
    1. Creation; Name; Purpose
    2. Irrevocability & Limited Modification
    3. Funding; Policies; No Incidents of Ownership
    4. Contributions & Crummey Withdrawal Rights
    5. Distributions & Beneficial Interests
    6. Spendthrift & Creditor Protection
    7. Tax Matters
    8. Trustee Powers & Duties
IV. Representations & Warranties
V. Covenants & Restrictions
VI. Default, Removal & Remedies
VII. Risk Allocation
VIII. Dispute Resolution
IX. General Provisions
X. Execution Block
Schedule A — Insurance Policies, Beneficiaries & Withdrawal Beneficiaries
Exhibit 1 — Crummey Withdrawal Notice (Form)

I. DOCUMENT HEADER

This IRREVOCABLE LIFE INSURANCE TRUST AGREEMENT (the "Agreement") is made and entered into on [EFFECTIVE DATE] (the "Effective Date") by and between:

• [SETTLOR LEGAL NAME] (the "Settlor" and the insured under the Policies), residing at [SETTLOR ADDRESS]; and
• [TRUSTEE LEGAL NAME], with principal address at [TRUSTEE ADDRESS] (the "Trustee"), an independent trustee who is not the Settlor, the Settlor's spouse, or a beneficiary.

Recitals
A. Settlor desires to create an irrevocable life insurance trust under the laws of the State of Connecticut to own life insurance on Settlor's life and to remove the death benefit from Settlor's taxable estate.
B. Trustee is willing to accept the trusteeship and to hold, manage, and distribute the Trust Estate pursuant to the terms herein.
C. The parties intend that this Trust be governed by the Connecticut Uniform Trust Code and other applicable Connecticut law, and that Settlor retain no incidents of ownership in the Policies within the meaning of 26 U.S.C. § 2042.

NOW, THEREFORE, in consideration of the foregoing and the mutual covenants herein, the parties agree as follows:

II. DEFINITIONS

For purposes of this Agreement, capitalized terms have the meanings set forth below. Any term used but not defined herein shall have the meaning assigned under the CT-UTC.

"Accountings" – The periodic written reports described in Section 8.4.
"Beneficiary" – Each person or entity identified in Schedule A or otherwise entitled to current or future distributions of income or principal.
"Code" – The Internal Revenue Code of 1986, as amended.
"Contribution" – Any cash or property transferred to the Trust, including amounts to fund premiums.
"Crummey Power" – The limited right of withdrawal granted under Section 4.
"CT-UTC" – The Connecticut Uniform Trust Code, Conn. Gen. Stat. §§ 45a-499a to 45a-500s.
"Incidents of Ownership" – The powers described in Treas. Reg. § 20.2042-1(c), including the power to change the beneficiary, surrender or cancel a Policy, assign or pledge a Policy, or borrow against its cash value.
"Insured" – The Settlor.
"Policy" or "Policies" – Each life insurance policy on the life of the Insured held by the Trustee and listed on Schedule A, and any replacement or additional policy.
"Qualified Beneficiary" – As defined in Conn. Gen. Stat. § 45a-499c.
"Trust" – The irrevocable life insurance trust created hereby, to be known as "[TRUST NAME]."
"Trust Estate" – All Policies, proceeds, assets, income, and additions subject to this Agreement.
"Withdrawal Beneficiary" – Each Beneficiary granted a Crummey Power under Section 4.

III. OPERATIVE PROVISIONS

1. Creation; Name; Purpose

1.1 Creation. Settlor transfers and delivers to Trustee the property and Policies described on Schedule A (the "Initial Corpus"), receipt of which Trustee acknowledges, to hold in trust upon the terms herein.
1.2 Name. The Trust shall be known as "[TRUST NAME]".
1.3 Purpose. The Trust is established to (a) own life insurance on Settlor's life so that the death benefit is excluded from Settlor's gross estate under 26 U.S.C. § 2042 and from the Connecticut taxable estate; (b) provide liquidity and managed support to the Beneficiaries; and (c) enable annual-exclusion premium gifts through Crummey withdrawal rights under Code §§ 2503(b) and 2514.

2. Irrevocability & Limited Modification

2.1 Irrevocability. This Trust is irrevocable. Settlor expressly waives all rights, statutory or equitable, to revoke, amend, or modify this Agreement and surrenders all Incidents of Ownership in the Policies.
2.2 Limited Modification.
(a) Nonjudicial Settlement. The Trustee and all Qualified Beneficiaries may, by unanimous written agreement, modify administrative (but not dispositive) provisions pursuant to Conn. Gen. Stat. § 45a-499hh, provided no modification contravenes a material purpose of the Trust or restores any power to Settlor.
(b) Court Approval. A Probate Court of competent jurisdiction may modify or terminate the Trust as authorized by Conn. Gen. Stat. § 45a-499i, subject to the Trust's spendthrift protections.
(c) Settlor reserves no power of appointment and no Incident of Ownership.

3. Funding; Policies; No Incidents of Ownership

3.1 Assignment or Purchase. Trustee shall be named owner and beneficiary of each Policy. Existing Policies are assigned to Trustee by absolute assignment recorded with the insurer; new Policies are applied for and purchased by Trustee.
3.2 No Incidents of Ownership (26 U.S.C. § 2042). 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 or at the direction of Settlor. Retention of any such power by Settlor would cause estate inclusion.
3.3 Three-Year Rule (26 U.S.C. § 2035). If Settlor transfers an existing Policy and dies within three (3) years, the proceeds may be included in Settlor's gross estate. Policies originally purchased by the Trustee avoid this lookback.
3.4 Additional Contributions. Any person, including Settlor, may transfer additional property to the Trust, subject to Section 4.

4. Contributions & Crummey Withdrawal Rights (26 U.S.C. §§ 2503(b), 2514)

4.1 Grant of Power. Upon each Contribution, each Withdrawal Beneficiary listed on Schedule A may withdraw 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).
4.2 Notice Procedure. The Trustee shall give prompt written notice (substantially in the form of Exhibit 1) to each Withdrawal Beneficiary (or the guardian of a minor or incapacitated Beneficiary) describing the Contribution, the withdrawal amount, and the deadline.
4.3 Exercise Period. The right is exercisable for [30] days after notice and lapses to the extent not timely exercised in writing.
4.4 Hanging Power; 5-and-5. To the extent a Beneficiary's lapsing withdrawal right in any year exceeds the greater of $5,000 or 5% of Trust corpus (Code § 2514(e)), the excess shall not lapse that year but shall carry over and lapse in succeeding years only within the 5-and-5 limit.
4.5 Records. Trustee shall retain all Crummey notices and records of exercise or lapse for the life of the Trust.

5. Distributions & Beneficial Interests

5.1 During the Insured's Lifetime. Trustee shall hold the Trust primarily to keep the Policies in force, applying income and Contributions to premiums. No Beneficiary may compel distribution except through a Crummey Power.
5.2 Upon the Insured's Death. Trustee shall collect the death benefit and may, in Trustee's discretion, purchase assets from or lend to Settlor's estate, or pay estate obligations at the executor's request; no proceeds shall be paid to or for the benefit of Settlor's estate except as so authorized.
5.3 Distribution to Beneficiaries. Trustee shall thereafter distribute income and principal for the health, education, maintenance, and support ("HEMS") of the Beneficiaries on the terms set forth on Schedule A.
5.4 Information Rights. Trustee shall provide Accountings at least annually to each Qualified Beneficiary, consistent with Conn. Gen. Stat. § 45a-499oo.

6. Spendthrift & Creditor Protection

6.1 Spendthrift Clause. The interest of any Beneficiary shall not be subject to voluntary or involuntary transfer, assignment, pledge, or seizure by creditors, and no Beneficiary may anticipate or encumber distributions.
6.2 Insurance Creditor Protection. Death proceeds payable to the Trust as beneficiary are protected against the Insured's creditors under Conn. Gen. Stat. § 38a-453, and cash surrender values are protected under Conn. Gen. Stat. § 38a-454, except in cases of transfer with intent to defraud creditors.

7. Tax Matters

7.1 Estate Exclusion. No power held by any person shall cause inclusion of the Policies or proceeds in Settlor's gross estate under Code §§ 2035–2042 or in the Connecticut taxable estate under Conn. Gen. Stat. § 12-391.
7.2 Connecticut Gift Tax. Settlor acknowledges that transfers to this Trust are gifts subject to the Connecticut gift tax under Conn. Gen. Stat. § 12-642, which (like the federal gift tax) provides for an annual per-donee exclusion that the Crummey powers in Section 4 are designed to preserve.
7.3 Generation-Skipping Transfer Tax. Trustee shall cooperate with Settlor's tax advisors to allocate available GST exemption (Code §§ 2601, 2631) where a dynasty term is intended.
7.4 Tax Identification & Reporting. Trustee shall obtain an EIN and file all required federal and Connecticut fiduciary income tax returns.

8. Trustee Powers & Duties

8.1 Insurance Powers. Trustee may, in a fiduciary capacity, pay premiums; apply for, own, and accept Policies; exercise dividend and nonforfeiture options; effect Code § 1035 exchanges; surrender or replace Policies; and collect death benefits.
8.2 General Powers. Trustee shall have all powers necessary to manage the Trust Estate, incorporating Conn. Gen. Stat. § 45a-499kk, subject to the prudent investor rule (CT-UPIA).
8.3 Delegation. Trustee may delegate investment functions consistent with Conn. Gen. Stat. § 45a-541b, retaining oversight.
8.4 Accountings. Trustee shall deliver annual Accountings within 90 days of fiscal year-end and upon termination or change of trustee.
8.5 Perpetuities; Termination. Unless terminated earlier, the Trust shall vest or terminate within the period required by the Connecticut Uniform Statutory Rule Against Perpetuities, Conn. Gen. Stat. § 45a-491 (interests must vest or terminate no later than 21 years after a life in being or within 90 years after creation). The Trust shall in all events terminate, and Trustee shall distribute the remaining Trust Estate to the then-living Remainder Beneficiaries per stirpes, no later than the expiration of that period.

IV. REPRESENTATIONS & WARRANTIES

4.1 Settlor Representations.
(a) Capacity. Settlor is of legal age, has full capacity, and is not under duress.
(b) Title. Settlor owns the Initial Corpus and Policies free of undisclosed liens or adverse claims and has no present intent to defraud creditors.
(c) Tax Advice. Settlor has obtained, or had the opportunity to obtain, independent tax and legal advice.

4.2 Trustee Representations.
(a) Authority and qualification, and, if an entity, good standing.
(b) Independence. Trustee is not the Settlor, the Settlor's spouse, or a beneficiary, and will retain no Incident of Ownership for Settlor's benefit.
(c) Acceptance of the trust and its duties.

V. COVENANTS & RESTRICTIONS

5.1 Trustee shall: maintain the Policies in force to the extent funded; send timely Crummey notices; maintain records under recognized fiduciary accounting standards; and comply with applicable law.

5.2 Trustee shall not: (a) permit Settlor to exercise or direct any Incident of Ownership; (b) distribute income or principal to or for Settlor; or (c) engage in self-dealing except as permitted under CT-UTC § 45a-499ll with required disclosures.

VI. DEFAULT, REMOVAL & REMEDIES

6.1 Events of Default. (a) Trustee's breach of Fiduciary Duty resulting in material loss, including failure to maintain a Policy or send Crummey notices; (b) failure to render Accountings; (c) insolvency, bankruptcy, or incapacity of Trustee; or (d) violation of a court order.

6.2 Notice & Cure. Qualified Beneficiaries may issue written notice of Default. Trustee has 30 days to cure, or such longer period as is reasonable if cure is commenced within 30 days and diligently pursued.

6.3 Remedies. If uncured, Beneficiaries may petition the Probate Court for removal or surcharge under CT-UTC, seek injunctive relief, or compel an accounting or restitution.

6.4 Successor Trustee. Upon removal, resignation, or death, the successor designated on Schedule A (or, failing that, an independent successor appointed by the Probate Court who is not the Settlor, the Settlor's spouse, or a related or subordinate party within Code § 672(c)) shall assume office after written acceptance.

VII. RISK ALLOCATION

7.1 Indemnification of Trustee. Trustee and its agents shall be indemnified out of the Trust Estate against any liability or expense, including reasonable attorneys' fees, incurred in good faith and in accordance with this Agreement, except arising from gross negligence, willful misconduct, or bad faith.

7.2 Limitation of Liability. Trustee shall not be personally liable for obligations of the Trust; liability is limited to the value of the Trust Estate.

7.3 Insurance. Trustee may purchase fiduciary liability insurance, premiums payable from the Trust.

7.4 Force Majeure. Trustee shall not be liable for failure to act due to events beyond its reasonable control.

VIII. DISPUTE RESOLUTION

8.1 Governing Law. This Agreement is governed by the laws of the State of Connecticut, without regard to conflicts-of-law principles.

8.2 Exclusive Forum. Except as provided in Section 8.4, any judicial proceeding relating to the Trust shall be brought exclusively in the [PROBATE DISTRICT] Probate Court, State of Connecticut.

8.3 Injunctive Relief. The right to seek injunctive relief to enforce the Trust is preserved notwithstanding any alternative dispute mechanism.

8.4 Arbitration (Optional).
☐ Included. Any dispute not subject to exclusive Probate Court jurisdiction shall be resolved by binding arbitration under the Commercial Rules of the American Arbitration Association, held in [CITY], Connecticut, applying Connecticut trust law.
☐ Omitted. (Default)

IX. GENERAL PROVISIONS

9.1 Amendment & Waiver. Except as permitted in Section 2.2, no amendment is effective unless in a writing executed by Trustee and all Qualified Beneficiaries and, where required, approved by the Probate Court. No amendment may benefit Settlor.

9.2 Assignment. No party may assign rights or delegate duties except as expressly permitted herein or by law.

9.3 Successors & Assigns. This Agreement binds and inures to the benefit of the parties and their respective successors and assigns.

9.4 Severability. If any provision is held invalid, the remaining provisions shall remain in full force, and the court shall reform the Agreement to effectuate the Settlor's intent.

9.5 Integration. This Agreement, with all Schedules and Exhibits, constitutes the entire agreement and supersedes all prior understandings.

9.6 Counterparts; Electronic Signatures. This Agreement may be executed in counterparts, including by electronic means, each deemed an original.

9.7 Headings. Headings are for convenience only.

X. EXECUTION BLOCK

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

TRUSTEE ACCEPTANCE

The undersigned accepts the trusteeship of "[TRUST NAME]," acknowledges receipt of the Initial Corpus, and agrees to perform all duties imposed herein.

[____________________________]
[TRUSTEE NAME], Trustee Date: [__/__/____]
EIN (once obtained): [____________________________]

NOTARIZATION

State of Connecticut )
County of [________________] ) ss. [CITY], on this ___ day of __________, 20__, before me personally appeared [____________________________] (Settlor) and [____________________________] (Trustee), known to me (or satisfactorily proven) to be the persons whose names are subscribed to the foregoing instrument and acknowledged that they executed the same for the purposes therein contained.

[____________________________]
Notary Public
My Commission Expires: [________________]

SCHEDULE A – INSURANCE POLICIES, BENEFICIARIES & WITHDRAWAL BENEFICIARIES

Life Insurance Policies:

Withdrawal Beneficiaries (Crummey):

Dispositive Terms at Insured's Death:

Successor Trustee: [____________________________]

EXHIBIT 1 – CRUMMEY WITHDRAWAL NOTICE (FORM)

[__/__/____]

To: [WITHDRAWAL BENEFICIARY / GUARDIAN OF MINOR BENEFICIARY]
Re: [TRUST NAME]

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, 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). Any portion of your right that exceeds the greater of $5,000 or 5% of the Trust corpus will not lapse this year and will carry over as provided in the Trust Agreement.

Trustee: [____________________________]
Address: [____________________________]

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

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

SOURCES AND REFERENCES

• Connecticut Uniform Trust Code, Conn. Gen. Stat. §§ 45a-499a to 45a-500s — https://www.cga.ct.gov/current/pub/chap_802c.htm
• Conn. Gen. Stat. § 45a-491 (Uniform Statutory Rule Against Perpetuities — 90-year period)
• Conn. Gen. Stat. § 38a-453 (Rights of creditors of insured against beneficiary) — https://codes.findlaw.com/ct/title-38a-insurance/ct-gen-st-sect-38a-453/
• Conn. Gen. Stat. § 38a-454 (Exemption of life insurance cash value)
• Conn. Gen. Stat. § 12-391 (Connecticut estate tax) — https://law.justia.com/codes/connecticut/title-12/chapter-217/section-12-391/
• Conn. Gen. Stat. § 12-642 (Connecticut gift tax)
• 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 Connecticut state death/gift tax: Connecticut imposes BOTH a state estate tax (§ 12-391) and a state gift tax (§ 12-642) — the only state with a standalone gift tax. The Connecticut exemption is tied to the federal basic exclusion amount. A properly structured ILIT removes the death benefit from both the federal and Connecticut taxable estates; counsel should confirm current Connecticut exemption thresholds and gift-tax filing obligations.