Irrevocable Life Insurance Trust (ILIT)

IRREVOCABLE LIFE INSURANCE TRUST (ILIT) AGREEMENT

(Established Under Delaware Law — Dynasty / Directed-Trust Jurisdiction)

TABLE OF CONTENTS

1. Document Header
2. Definitions

3. Operative Provisions
   3.1 Creation and Funding
   3.2 Trust Purpose
   3.3 Irrevocability
   3.4 Policies; No Incidents of Ownership; Three-Year Rule
   3.5 Contributions & Crummey Withdrawal Rights
   3.6 Dispositive Provisions
   3.7 Spendthrift Protection
   3.8 Trust Protector
   3.9 Trustee Powers (including Insurance Powers)
   3.10 Tax Provisions
   3.11 Perpetuities & Termination

4. Representations & Warranties

5. Covenants & Restrictions
6. Default & Remedies
7. Risk Allocation
8. Dispute Resolution
9. General Provisions
10. Execution Block
    Schedule A — Beneficiaries & Withdrawal Beneficiaries
    Schedule B — Insurance Policies & Initial Trust Assets
    Exhibit 1 — Crummey Withdrawal Notice (Form)

1. DOCUMENT HEADER

1.1 Title and Parties
This Irrevocable Life Insurance Trust Agreement (this "Agreement") is made and entered into as of [EFFECTIVE DATE] (the "Effective Date") by and between:

(a) [SETTLOR LEGAL NAME], an individual whose principal residence is [ADDRESS] ("Settlor" and the insured under the Policies); and

(b) [TRUSTEE LEGAL NAME], a [individual/corporate] qualified trustee under 12 Del. C. § 3301 ("Trustee"), who is not the Settlor, the Settlor's spouse, or a beneficiary. To obtain Delaware situs, at least one Trustee should be a Delaware resident or Delaware bank or trust company.

1.2 Recitals
A. Settlor desires to create an irrevocable trust to own life insurance on Settlor's life, removing the death benefit from Settlor's gross estate under 26 U.S.C. § 2042, and to take advantage of Delaware's favorable trust laws (including the abolition of the rule against perpetuities for personal property under 25 Del. C. § 503).
B. Trustee is willing to accept the Trust Assets and to administer them in accordance with the terms herein and applicable law.
C. This Agreement is intended to be irrevocable and governed by the laws of the State of Delaware, including the Delaware Trust Act, and Settlor shall retain no incidents of ownership in the Policies.

1.3 Consideration
The mutual covenants herein constitute full and sufficient consideration.

2. DEFINITIONS

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

"Accounting Period" – Each fiscal year of the Trust or such other period selected by the Trustee for reporting.

"Beneficiary" – Each person or entity identified in Schedule A, together with any successor or additional beneficiary entitled to distributions.

"Code" – The United States 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.

"Delaware Trust Act" – Title 12 of the Delaware Code, Chs. 33–35, as amended.

"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 B, and any replacement or additional policy.

"Qualified Trustee" – A person or entity meeting the requirements of applicable Delaware law.

"Trust" – The irrevocable life insurance trust created by this Agreement, known as "[FORMAL TRUST NAME]".

"Trust Assets" – All property transferred to the Trustee, including the Policies, proceeds, and all additions and accretions.

"Trust Protector" – The person(s) appointed under Section 3.8.

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

3. OPERATIVE PROVISIONS

3.1 Creation and Funding

3.1.1 Establishment. Settlor establishes the Trust under the laws of the State of Delaware and delivers to Trustee the property and Policies described in Schedule B (the "Initial Trust Assets").
3.1.2 Additional Contributions. Additional property may be added at any time by Settlor or any third party with Trustee's written consent, subject to Section 3.5.

3.2 Trust Purpose

The Trust is created to:
(a) own life insurance on the Insured's life so the death benefit is excluded from the Insured's gross estate under Code § 2042;
(b) provide liquidity and managed support for the Beneficiaries; and
(c) achieve multigenerational (dynasty) transfer-tax and asset-protection objectives available under Delaware law.

3.3 Irrevocability

3.3.1 No Power to Revoke. The Trust is irrevocable. Settlor expressly waives any right or power, whether alone or with others, to alter, amend, revoke, or terminate the Trust, and surrenders all Incidents of Ownership in the Policies.
3.3.2 Limited Amendments by Trust Protector. The Trust may be amended solely by the Trust Protector under Section 3.8 to (i) correct scrivener's errors, (ii) maintain tax qualification (including § 2042 exclusion and GST status), or (iii) respond to changes in law, provided no amendment confers any beneficial interest or Incident of Ownership on the Settlor.

3.4 Policies; No Incidents of Ownership; Three-Year Rule

3.4.1 Ownership. 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.
3.4.2 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.
3.4.3 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.

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

3.5.1 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).
3.5.2 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.
3.5.3 Exercise Period. The right is exercisable for [30] days after notice and lapses to the extent not timely exercised in writing.
3.5.4 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.
3.5.5 Records. Trustee shall retain all Crummey notices and records of exercise or lapse for the life of the Trust.

3.6 Dispositive Provisions

3.6.1 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.
3.6.2 Upon the Insured's Death. Trustee shall collect the death benefit and may, in Trustee's sole discretion, purchase assets from or lend to the Insured'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.
3.6.3 Distribution to Beneficiaries. Trustee shall thereafter distribute principal and income for a Beneficiary's health, education, maintenance, or support ("HEMS") in Trustee's discretion, and on the further terms set forth in Schedule A, which may include perpetual (dynasty) continuing trusts.

3.7 Spendthrift Protection

The interest of any Beneficiary shall not be subject to voluntary or involuntary transfer, assignment, pledge, alienation, or attachment prior to actual receipt, consistent with 12 Del. C. § 3536. Death proceeds and avails payable to the Trust as beneficiary are further protected against the Insured's creditors under 18 Del. C. § 2725, except in cases of transfer with intent to defraud creditors.

3.8 Trust Protector

3.8.1 Appointment. [NAME/INITIAL PROTECTOR] is appointed Trust Protector.
3.8.2 Powers. Subject to Section 3.3.2, the Trust Protector may: (a) remove and replace any Trustee; (b) appoint or remove investment or distribution advisers under 12 Del. C. § 3313; (c) change the situs and governing law of the Trust; and (d) amend this Agreement to maintain the § 2042 exclusion and GST advantages — provided no exercise shall confer a benefit or Incident of Ownership on Settlor.
3.8.3 Fiduciary Capacity. Unless expressly stated, the Trust Protector acts in a non-fiduciary capacity.

3.9 Trustee Powers (including Insurance Powers)

3.9.1 Statutory Powers. Trustee shall have all powers granted under 12 Del. C. § 3325, as expanded or limited herein.
3.9.2 Insurance Powers. Without limitation, Trustee may, in a fiduciary capacity: 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 benefit of the Trust; and collect death benefits.
3.9.3 Direction. Trustee may act at the direction of an adviser or Trust Protector under 12 Del. C. § 3313 with the protections afforded a directed fiduciary.

3.10 Tax Provisions

3.10.1 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.
3.10.2 GST Allocation. Trustee shall cooperate with Settlor's tax advisors to allocate available GST exemption (Code §§ 2601, 2631) to Contributions to support a perpetual dynasty term.
3.10.3 Tax Reporting. Trustee shall obtain an EIN and file all required federal and state returns and provide K-1s or other statements to Beneficiaries.

3.11 Perpetuities & Termination

3.11.1 Personal Property — No Perpetuities Limit. Under 25 Del. C. § 503(a), no interest in personal property held in trust (including the Policies and proceeds) shall be void by reason of any rule against perpetuities or rule limiting trust duration; accordingly, the Trust may continue in perpetuity as a Delaware dynasty trust.
3.11.2 Real Property — 110-Year Rule. Any real property held in the Trust is subject to the 110-year rule of 25 Del. C. § 503(b) and shall, if still held at the expiration of 110 years from the later of the date it is added to or purchased by the Trust or the date the Trust became irrevocable, be distributed as provided in 25 Del. C. § 503(b).
3.11.3 Earlier Termination. Unless continued as a dynasty trust, the Trust shall terminate upon the earliest of (a) the death of the last surviving Beneficiary or (b) the date [XX] years from the Effective Date. Upon termination, Trustee shall distribute the remaining Trust Assets to the then-living Remainder Beneficiaries per stirpes.

4. REPRESENTATIONS & WARRANTIES

4.1 Settlor
(a) Authority. Settlor has full legal capacity to execute and deliver this Agreement.
(b) Title. Settlor conveys good title to the Trust Assets and Policies, free of liens except as disclosed in Schedule B, with no present intent to defraud creditors.

4.2 Trustee
(a) Qualification. Trustee is a Qualified Trustee and (if an entity) in good standing.
(b) Independence; No Conflict. Trustee is not the Settlor, the Settlor's spouse, or a beneficiary, and execution of this Agreement does not violate any governing document or fiduciary duty.

4.3 Survival. All representations and warranties survive execution and remain in effect until final distribution of the Trust Assets.

5. COVENANTS & RESTRICTIONS

5.1 Settlor Covenants
(a) No Reacquisition. Settlor shall not reacquire, directly or indirectly, any Trust Assets or Incident of Ownership in any Policy.
(b) Further Assurances. Settlor will execute any documents necessary to vest title in Trustee.

5.2 Trustee Covenants
(a) Fiduciary Compliance and good-faith administration; maintain the Policies in force to the extent funded; send timely Crummey notices.
(b) Accounting. Trustee shall provide annual statements within [90] days of fiscal year-end.

5.3 Notice Obligations
Trustee shall notify the Trust Protector and Beneficiaries of any significant litigation, tax audit, or potential liability within [30] days.

6. DEFAULT & REMEDIES

6.1 Events of Default
(a) Trustee's failure to provide required accountings or to maintain a Policy or send Crummey notices;
(b) Breach of fiduciary duty as determined by final order;
(c) Trustee insolvency or resignation without qualified successor.

6.2 Cure Period
Trustee has [30] days after written notice by the Trust Protector to cure any default under Section 6.1(a) or (b).

6.3 Remedies
(a) Removal and Replacement by the Trust Protector and appointment of an independent successor.
(b) Injunctive Relief from a court of competent jurisdiction to protect Trust Assets.
(c) Surcharge to the extent of losses proximately caused by breach.

7. RISK ALLOCATION

7.1 Indemnification of Trustee

To the fullest extent permitted by 12 Del. C. § 3585, the Trust shall indemnify, defend, and hold harmless the Trustee and Indemnified Parties from any claims, liabilities, and expenses arising out of good-faith administration of the Trust, except for losses resulting from willful misconduct or gross negligence.

7.2 Limitation of Liability

Liability of the Trustee and any Indemnified Party, however arising, shall be limited to the Trust Assets; no personal or corporate assets shall be subject to any judgment.

7.3 Insurance

Trustee may, at Trust expense, procure fiduciary liability insurance covering the Indemnified Parties.

7.4 Force Majeure

No party shall be liable for failure to perform due to events beyond its reasonable control.

8. DISPUTE RESOLUTION

8.1 Governing Law
This Agreement is governed by and construed in accordance with the laws of the State of Delaware, without regard to conflict-of-law principles.

8.2 Exclusive Jurisdiction
Any proceeding arising under or relating to this Agreement shall be brought exclusively in the Court of Chancery of the State of Delaware sitting in and for [New Castle/Kent/Sussex] County, or, if such court lacks subject-matter jurisdiction, in the Delaware Superior Court or Delaware Court of Chancery (probate matters).

8.3 Optional Arbitration
[SELECT "INCLUDE" OR "OMIT"]
IF "INCLUDE":
(a) Any dispute not resolved within [60] days of written notice shall be finally settled by confidential arbitration administered by the American Arbitration Association under its Commercial Arbitration Rules.
(b) The seat of arbitration shall be Wilmington, Delaware.
(c) Notwithstanding this clause, a party may seek provisional injunctive relief in a Delaware court to preserve the status quo.

8.4 Jury Waiver
Jury trials are not available in Delaware trust administration proceedings; accordingly, no waiver clause is necessary.

9. GENERAL PROVISIONS

9.1 Amendment and Waiver
Except as provided in Section 3.3.2, this Agreement may not be amended or waived except by written instrument executed by the Trust Protector and, if adversely affected, the Trustee or the affected Beneficiary. No amendment may benefit Settlor.

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

9.3 Successors and Assigns
This Agreement binds and benefits the parties and their respective successors and permitted assigns.

9.4 Severability
Any invalid provision shall be severed and the remainder shall remain in full force; the invalid provision shall be reformed to best effectuate the parties' intent.

9.5 Integration
This Agreement, together with Schedules A–B and Exhibit 1, constitutes the entire agreement and supersedes all prior discussions.

9.6 Counterparts; Electronic Signatures
This Agreement may be executed in counterparts, each deemed an original. Signatures delivered electronically are binding.

10. EXECUTION BLOCK

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

EIN (once obtained): [____________________________]

ACKNOWLEDGMENT (Notary)

State of Delaware
County of [________________]

On this ___ day of __________, 20__, before me personally appeared [SETTLOR LEGAL NAME] and [TRUSTEE LEGAL NAME], proved to me on the basis of satisfactory evidence to be the persons whose names are subscribed to this instrument, and acknowledged that they executed the same for the purposes therein contained.

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

SCHEDULE A – BENEFICIARIES & WITHDRAWAL BENEFICIARIES

Dynasty Term: ☐ Perpetual (Delaware personal-property trust under 25 Del. C. § 503(a)) ☐ Terminate after [____] years / measuring lives.

SCHEDULE B – INSURANCE POLICIES & INITIAL TRUST ASSETS

Other initial assets (cash for first premium, etc.): [____________________________]
Disclosed liens or encumbrances (state "None" if none): [____________________________]

EXHIBIT 1 – CRUMMEY WITHDRAWAL NOTICE (FORM)

[__/__/____]

To: [WITHDRAWAL BENEFICIARY / GUARDIAN OF MINOR BENEFICIARY]
Re: [FORMAL 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

• Delaware Trust Act, 12 Del. C. §§ 3301 et seq. — https://delcode.delaware.gov/title12/
• 12 Del. C. § 3313 (Directed trusts / advisers); § 3325 (Trustee powers); § 3536 (Spendthrift); § 3585 (Trustee indemnity / limitations)
• 25 Del. C. § 503 (Rule against perpetuities — personal property exempt; real property 110-year rule) — https://law.justia.com/codes/delaware/title-25/chapter-5/section-503/
• 18 Del. C. § 2725 (Exemption of life insurance proceeds and avails) — https://law.justia.com/codes/delaware/2012/title18/c027/sc01/2725/
• 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 Delaware state death tax: Delaware repealed its state estate tax effective for deaths on or after January 1, 2018, and imposes no inheritance tax. Delaware's principal ILIT advantages are its dynasty-trust law (perpetual trusts for personal property under 25 Del. C. § 503), directed-trust statute (§ 3313), and strong creditor-protection and confidentiality regime. Planning focuses on federal estate, gift, and GST tax.