Irrevocable Life Insurance Trust (ILIT)

IRREVOCABLE LIFE INSURANCE TRUST (ILIT) AGREEMENT

(District of Columbia – Uniform Trust Code Jurisdiction)

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TABLE OF CONTENTS

1. Document Header
2. Definitions
3. Operative Provisions
4. Representations & Warranties
5. Covenants & Restrictions
6. Default & Remedies
7. Risk Allocation
8. Dispute Resolution
9. General Provisions
10. Execution Block
11. Schedule A – Insurance Policies & Trust Property
12. Schedule B – Beneficiaries & Withdrawal Beneficiaries
13. Exhibit 1 – Crummey Withdrawal Notice (Form)

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1. DOCUMENT HEADER

IRREVOCABLE LIFE INSURANCE TRUST AGREEMENT (this "Agreement") is executed and made effective as of [EFFECTIVE DATE] (the "Effective Date") by and between:

• [SETTLOR LEGAL NAME], an individual residing at [SETTLOR ADDRESS] ("Settlor" and the insured under the Policies); and
• [TRUSTEE LEGAL NAME], [individual | District of Columbia corporation | national bank], having a principal address at [TRUSTEE ADDRESS] ("Trustee"), who is not the Settlor, the Settlor's spouse, or a beneficiary (an Independent Trustee).

Recitals

A. Settlor, desiring to provide for the Beneficiaries and to remove life insurance proceeds from Settlor's taxable estate, wishes to create an irrevocable life insurance trust under the laws of the District of Columbia.
B. Trustee is willing to accept the trust and to hold and administer the Trust Estate, including the Policies, for the purposes set forth herein.
C. Settlor is transferring to Trustee the property and Policies described in Schedule A and intends to retain no incidents of ownership in the Policies within the meaning of 26 U.S.C. § 2042.

NOW, THEREFORE, Settlor hereby irrevocably delivers, assigns, and conveys to Trustee all property described in Schedule A to be held IN TRUST, subject to the following terms and conditions:

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2. DEFINITIONS

For purposes of this Agreement, the following terms shall have the meanings set forth below. Defined terms appear in initial capital letters. Singular includes the plural and vice-versa.

"Accounting Period" – Each calendar year ending December 31, or such other period selected by Trustee that is permissible under applicable law.

"Applicable Law" – The District of Columbia Uniform Trust Code (D.C. Code §§ 19-1301.01 et seq.) and all other District of Columbia statutes, regulations, and common law governing trusts, together with applicable federal law.

"Beneficiaries" – Those individuals and/or entities listed on Schedule B, together with any Permitted Issue.

"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 3.5.

"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.

"Independent Trustee" – A Trustee who is not (i) Settlor, (ii) a Beneficiary, or (iii) a related or subordinate party within the meaning of Code § 672(c).

"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.

"Trust Estate" – All property, including the Policies and proceeds, together with all additions, accretions, substitutions, and reinvestments, now or hereafter held by Trustee.

"Withdrawal Beneficiary" – Each Beneficiary granted a Crummey Power under Section 3.5.

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3. OPERATIVE PROVISIONS

3.1 Creation and Funding

(a) Settlor hereby irrevocably transfers to Trustee the property and Policies set forth in Schedule A.
(b) The Trust shall be known as the "[SETTLOR SURNAME] IRREVOCABLE LIFE INSURANCE TRUST" (the "Trust").
(c) 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 Purpose

The primary purpose of the Trust is to own life insurance on the Insured's life so the death benefit is excluded from the Insured's gross estate under Code § 2042 and from the District of Columbia taxable estate, to provide liquidity and support for the Beneficiaries under the HEMS Standard, and to enable annual-exclusion premium gifts through Crummey withdrawal rights.

3.3 Irrevocability

This Trust is irrevocable. Settlor expressly waives any right or power, alone or with any other person, to alter, amend, revoke, or terminate the Trust, and surrenders all Incidents of Ownership in the Policies, except as permitted by Applicable Law upon petition to the Superior Court of the District of Columbia, Probate Division ("DC Probate Court") with the written consent of all Beneficiaries — provided no modification may benefit Settlor.

3.4 No Incidents of Ownership; Three-Year Rule

(a) 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.
(b) 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.

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

(a) Grant of Power. Upon each Contribution, each Withdrawal Beneficiary listed on Schedule B 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).
(b) 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.
(c) Exercise Period. The right is exercisable for [30] days after notice and lapses to the extent not timely exercised in writing.
(d) 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.
(e) Records. Trustee shall retain all Crummey notices and records of exercise or lapse for the life of the Trust.

3.6 Distributions

(a) 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.
(b) 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.
(c) Continuing Distributions – Trustee may thereafter distribute principal or income to any Beneficiary, in Trustee's sole and absolute discretion, for the HEMS Standard, and on the terms set forth on Schedule B (which may include continuing or dynasty trusts).

3.7 Spendthrift & Creditor Protection

No interest of any Beneficiary shall be subject to voluntary or involuntary transfer, anticipation, assignment, pledge, or seizure by legal or equitable process prior to actual receipt. Death proceeds payable to the Trust as beneficiary are protected against the Insured's creditors under D.C. Code § 31-4716, except in cases of transfer with intent to defraud creditors.

3.8 Trustee Powers (including Insurance Powers)

Except as limited herein, Trustee shall have all powers granted to a trustee under Applicable Law, including, without limitation, the powers to:

1. Pay premiums; apply for, own, and accept Policies; exercise dividend and nonforfeiture options; effect Code § 1035 exchanges; surrender, replace, borrow against, or pledge a Policy solely for the Trust's benefit; and collect death benefits;
2. Invest and reinvest pursuant to the prudent investor rule;
3. Buy, sell, lease, or exchange Trust assets;
4. Borrow, encumber, or pledge Trust assets, limited solely to the Trust Estate;
5. Employ agents, custodians, and professionals; and
6. Sign tax returns and other filings on behalf of the Trust.

3.9 Tax Treatment & Perpetuities

(a) 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 District taxable estate under D.C. Code § 47-3701 et seq.
(b) GST Tax – Trustee shall cooperate with Settlor's tax advisors to allocate available GST exemption (Code §§ 2601, 2631) where a dynasty term is intended.
(c) Perpetuities – The District's statutory rule against perpetuities (D.C. Code § 19-901) generally requires vesting within 21 years after a life in being or within 90 years after creation. However, under D.C. Code § 19-904(a)(10), § 19-901 does not apply to a trust whose governing instrument so states and whose trustee has the power to hold, sell, lease, or mortgage property for any period beyond the otherwise-required vesting period. [SELECT ONE] ☐ This Trust opts out under § 19-904(a)(10), and the Trustee is granted such power, so the Trust may continue as a perpetual (dynasty) trust. ☐ This Trust is subject to the 90-year period of § 19-901 and shall terminate accordingly.
(d) Tax Reporting – Trustee shall obtain an EIN and file all required federal and District fiduciary income tax returns.

3.10 Trustee Succession

(a) Resignation – Trustee may resign upon sixty (60) days' written notice to all adult Beneficiaries.
(b) Removal – A majority of adult Beneficiaries may remove Trustee with or without cause and appoint an Independent Trustee.
(c) Successor Trustee – Failing such appointment, the DC Probate Court shall appoint an Independent successor, who shall not be the Settlor, the Settlor's spouse, or a related or subordinate party within Code § 672(c).

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4. REPRESENTATIONS & WARRANTIES

4.1 Settlor represents and warrants that:
(a) Settlor has full legal right, power, and authority to transfer the property and Policies described in Schedule A, free and clear of undisclosed liens, with no present intent to defraud creditors;
(b) No provision of this Agreement violates any contract, court order, or Applicable Law binding upon Settlor; and
(c) Settlor understands that the Trust is irrevocable and that Settlor retains no beneficial ownership and no Incident of Ownership in any Policy.

4.2 Trustee represents and warrants that:
(a) Trustee has full power and authority to execute and perform under this Agreement;
(b) Trustee is an Independent Trustee qualified to act under Applicable Law; and
(c) Trustee will retain no Incident of Ownership for Settlor's benefit.

These representations survive execution and continue throughout Trustee's tenure.

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5. COVENANTS & RESTRICTIONS

5.1 Trustee shall:
(a) Administer the Trust Estate with the care, skill, and prudence of a prudent person; maintain the Policies in force to the extent funded; and send timely Crummey notices;
(b) Maintain complete books and provide an annual written accounting to each adult Beneficiary within ninety (90) days after each Accounting Period;
(c) File all required federal and District tax returns and pay taxes from the Trust Estate; and
(d) Furnish prompt written notice of any material litigation or governmental inquiry involving the Trust.

5.2 Trustee shall not:
(a) Permit Settlor to exercise or direct any Incident of Ownership;
(b) Distribute income or principal to or for the benefit of Settlor; or
(c) Engage in self-dealing prohibited by Applicable Law.

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6. DEFAULT & REMEDIES

6.1 Events of Default – Any of the following constitutes a default by Trustee:

1. Material breach of fiduciary duty, including failure to maintain a Policy or send Crummey notices;
2. Failure to provide required accountings within the time specified;
3. Fraud, gross negligence, or willful misconduct; or
4. Insolvency or appointment of a receiver for Trustee.

6.2 Notice & Cure – Any Beneficiary may deliver written notice of default. Trustee shall have thirty (30) calendar days to cure, unless the default is incapable of cure.

6.3 Remedies – Upon an uncured default: (a) removal and replacement of Trustee; (b) surcharge against Trustee's compensation; (c) specific performance or injunctive relief; and (d) recovery of reasonable attorneys' fees and costs.

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7. RISK ALLOCATION

7.1 Indemnification of Trustee

To the fullest extent permitted by Applicable Law, the Trust Estate shall indemnify and hold harmless Trustee against any claims, liabilities, expenses, and damages arising out of Trustee's good-faith administration of the Trust, except for losses resulting from Trustee's fraud, gross negligence, or willful misconduct.

7.2 Limitation of Liability

Trustee's personal liability shall be limited to the Trust Estate; no personal assets of Trustee shall be subject to attachment for any obligation incurred in the proper administration of the Trust.

7.3 Insurance

Trustee may, at the expense of the Trust Estate, procure fiduciary liability insurance.

7.4 Force Majeure

Trustee shall not be liable for any delay or failure caused by events beyond Trustee's reasonable control, provided Trustee takes commercially reasonable steps to mitigate.

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8. DISPUTE RESOLUTION

8.1 Governing Law – This Agreement shall be governed by the laws of the District of Columbia, without regard to conflict-of-law principles.

8.2 Forum Selection – Subject to Section 8.3, the parties submit to the exclusive jurisdiction of the DC Probate Court for all proceedings concerning the Trust.

8.3 Arbitration (Optional) – By initialing here ___ and here ___, Settlor and Trustee agree to submit any dispute not exclusively within the statutory jurisdiction of the DC Probate Court to binding arbitration administered by [AAA | JAMS]. The seat of arbitration shall be Washington, DC.

8.4 Jury Waiver – Probate matters in the District are tried without a jury; accordingly, no jury waiver is required or provided.

8.5 Injunctive Relief – Nothing herein shall impair the DC Probate Court's authority to grant injunctive relief necessary to protect the Trust Estate.

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9. GENERAL PROVISIONS

9.1 Amendments – Due to the irrevocable nature of the Trust, this Agreement may be amended only (i) as expressly provided in Section 3.3 or (ii) by written instrument executed by Trustee and all Beneficiaries, and approved by the DC Probate Court if required. No amendment may benefit Settlor.

9.2 Waiver – No waiver of any breach shall be deemed a waiver of any subsequent breach. Any waiver must be in writing.

9.3 Assignment – No party may assign or delegate any right or obligation except as expressly provided by this Agreement or Applicable Law.

9.4 Successors & Assigns – This Agreement binds and inures to the benefit of the parties and their respective heirs, personal representatives, successors, and assigns.

9.5 Severability – If any provision is held invalid, the remaining provisions shall remain in effect, and the invalid provision shall be modified to the minimum extent necessary to render it valid.

9.6 Entire Agreement – This instrument constitutes the entire agreement and supersedes all prior writings.

9.7 Counterparts; Electronic Signatures – This Agreement may be executed in counterparts (including by electronic signature), each an original.

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10. EXECUTION BLOCK

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

SETTLOR (Insured)

[____________________________]
[SETTLOR NAME]

Date: [__/__/____]

TRUSTEE

[____________________________]
[TRUSTEE NAME], as Trustee

Date: [__/__/____]

EIN (once obtained): [____________________________]

NOTARY ACKNOWLEDGMENT

District of Columbia, ss:

On this ___ day of __________, 20__, before me personally appeared [SETTLOR NAME] and [TRUSTEE NAME], 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: [________________]

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11. SCHEDULE A – INSURANCE POLICIES & TRUST PROPERTY

Life Insurance Policies:

Other Trust Property (cash for first premium, etc.): [____________________________]

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12. SCHEDULE B – BENEFICIARIES & WITHDRAWAL BENEFICIARIES

Permitted Issue: Biological and legally adopted descendants.
Successor Trustee: [____________________________]

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13. EXHIBIT 1 – CRUMMEY WITHDRAWAL NOTICE (FORM)

[__/__/____]

To: [WITHDRAWAL BENEFICIARY / GUARDIAN OF MINOR BENEFICIARY]
Re: [SETTLOR SURNAME] Irrevocable Life Insurance Trust

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: [__/__/____]

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SOURCES AND REFERENCES

• District of Columbia Uniform Trust Code, D.C. Code §§ 19-1301.01 et seq. — https://code.dccouncil.gov/us/dc/council/code/titles/19
• D.C. Code § 19-901 (Statutory rule against perpetuities — 90-year period) — https://code.dccouncil.gov/us/dc/council/code/sections/19-901
• D.C. Code § 19-904(a)(10) (Exclusion / opt-out enabling perpetual trusts) — https://law.justia.com/codes/district-of-columbia/title-19/chapter-9/section-19-904/
• D.C. Code § 31-4716 (Rights of parties under life policies) — https://code.dccouncil.gov/us/dc/council/code/sections/31-4716
• D.C. Code § 47-3701 et seq. (District of Columbia estate tax) — https://otr.cfo.dc.gov/page/dc-estate-inheritance-and-fiduciary-tax-information
• 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 District of Columbia estate tax: The District imposes its own estate tax (D.C. Code § 47-3701 et seq.) with an exemption far below the federal level (approximately $4.87 million for 2025 decedents, indexed annually for inflation) and graduated rates up to 16%. Because the DC exemption is so much lower than the federal exemption, an ILIT can be especially valuable for District residents — it removes the death benefit from both the federal and DC taxable estates. Counsel should confirm the current DC exemption amount and Form D-76 filing obligations.