Irrevocable Life Insurance Trust (ILIT)

IRREVOCABLE LIFE INSURANCE TRUST (ILIT) AGREEMENT

(Massachusetts Uniform Trust Code — M.G.L. c. 203E Governing Instrument)

TABLE OF CONTENTS

1. Document Header
2. Definitions
3. Irrevocability
4. Funding the Trust
5. No Incidents of Ownership (IRC § 2042)
6. Three-Year Rule (IRC § 2035)
7. Contributions and Premium Payments
8. Crummey Withdrawal Rights
9. Trustee Powers (Insurance)
10. Distributions
11. Spendthrift Provision
12. Perpetuities and Termination
13. Generation-Skipping Transfer (GST) Provisions
14. Governing Law; Trustee Succession
15. Execution Block
16. Schedule A – Insurance Policies and Trust Property
17. Exhibit 1 – Crummey Notice Letter

1. DOCUMENT HEADER

1. Title; Parties; Date. This Irrevocable Life Insurance Trust Agreement (the "Agreement" or "Trust Instrument") is entered into and made effective as of [EFFECTIVE DATE] (the "Effective Date") by and between [GRANTOR LEGAL NAME], of [ADDRESS] (the "Grantor," "Settlor," or "Insured"), and [TRUSTEE LEGAL NAME], of [ADDRESS] (the "Trustee"), who is not the Grantor.

2. Recitals. Grantor desires to create an irrevocable trust under the laws of the Commonwealth of Massachusetts to own life insurance on Grantor's life so the proceeds pass outside Grantor's gross estate under 26 U.S.C. § 2042 and outside Grantor's Massachusetts taxable estate under M.G.L. c. 65C. Grantor shall not serve as Trustee and retains no incidents of ownership.

3. Declaration of Trust. Grantor irrevocably assigns, conveys, and delivers the property on Schedule A (the "Trust Estate") to the Trustee to hold in trust under this Agreement and the Massachusetts Uniform Trust Code, M.G.L. c. 203E (the "MUTC").

2. DEFINITIONS

"Insurance Policy" or "Policy" – Any policy of life insurance on Grantor's life held by the Trustee, including each policy on Schedule A and any replacement or additional policy.
"Crummey Beneficiary" – Each Beneficiary granted a withdrawal right under Section 8.
"Independent Trustee" – A Trustee who is not the Grantor, not a beneficiary, and not a related or subordinate party to Grantor under 26 U.S.C. § 672(c).

3. IRREVOCABILITY

3.1 This Trust is irrevocable; Grantor relinquishes any power to revoke, amend, alter, or terminate it.
3.2 No person holds any power that would cause inclusion of the Trust Estate or any Policy in Grantor's gross estate under 26 U.S.C. §§ 2036, 2038, or 2042.
3.3 The Trustee may amend purely administrative provisions only, never to benefit Grantor or reduce a Beneficiary's vested interest.

4. FUNDING THE TRUST

4.1 Grantor transfers the Policy or Policies and other property on Schedule A; the Trustee accepts the Trust Estate.
4.2 Existing Policies are transferred by absolute assignment. New Policies should be applied for, owned, and funded by the Trustee from inception to avoid the three-year rule.
4.3 The Trustee, as beneficial owner, holds an insurable interest in Grantor's life.

5. NO INCIDENTS OF OWNERSHIP (IRC § 2042)

5.1 Grantor retains NO incident of ownership — no power to change beneficiaries, surrender, borrow, pledge, assign, or control any Policy.
5.2 The Trustee holds all Policy rights; paying premiums is not a prohibited incident of control.
5.3 A Trustee who is the Grantor's spouse or a beneficiary shall exercise distribution discretion only under an ascertainable standard, to avoid inclusion under §§ 2041/2042.

6. THREE-YEAR RULE (IRC § 2035)

6.1 If Grantor transfers an existing Policy and dies within three (3) years, the proceeds may be included under § 2035(a).
6.2 Policies the Trustee applies for, owns, and funds from inception avoid § 2035 exposure.

7. CONTRIBUTIONS AND PREMIUM PAYMENTS

7.1 Grantor may, but need not, contribute cash for premiums; no contribution restores any power to Grantor.
7.2 Before applying a contribution to premiums, the Trustee gives each Crummey Beneficiary written notice (Exhibit 1).
7.3 The Trustee maintains a separate Trust account and records of all contributions, notices, and lapses.

8. CRUMMEY WITHDRAWAL RIGHTS (IRC §§ 2503(b), 2514)

8.1 Upon each contribution, each Crummey Beneficiary may withdraw his or her proportionate share by written demand to the Trustee.
8.2 Notice. The Trustee sends written notice (Exhibit 1) to each Crummey Beneficiary (or a minor's parent/guardian) within [____] days of each contribution.
8.3 Exercise period; lapse. The right is exercisable for [____] days (not fewer than 30) after notice and lapses thereafter.
8.4 Maximum. The right equals the lesser of (a) the Beneficiary's proportionate share, or (b) the annual exclusion under § 2503(b) ($[____] per donor in [____]).
8.5 Five-and-five / hanging power. Each annual lapse is limited to the greater of $5,000 or 5% of corpus (§ 2514(e)); any excess carries forward as a hanging power.

9. TRUSTEE POWERS (INSURANCE)

The Trustee, with all powers under the MUTC, may:
(a) apply for, acquire, own, and hold Policies on Grantor's life;
(b) pay premiums from income, principal, or contributions;
(c) receive dividends and elect non-forfeiture/settlement options;
(d) collect death proceeds and release insurers;
(e) borrow against, surrender, or exchange (§ 1035) a Policy when prudent;
(f) invest as a prudent fiduciary, with no duty to diversify away from the Policy;
(g) employ and pay counsel, accountants, and advisors.

10. DISTRIBUTIONS

10.1 During Grantor's Lifetime

The Trustee prioritizes premium payment and may, in its discretion, distribute to Beneficiaries (other than Grantor) for health, education, maintenance, and support. No distribution may be made to Grantor.

10.2 Upon Grantor's Death

10.3 Liquidity (Optional)

The Trustee may, but is not required to, purchase assets from or lend to Grantor's estate on arm's-length terms. The Trustee shall not be directed to pay Grantor's debts or estate taxes.

11. SPENDTHRIFT PROVISION

No Beneficiary may voluntarily or involuntarily transfer, assign, or encumber any interest, and no interest is subject to a Beneficiary's creditors before receipt, to the fullest extent of M.G.L. c. 203E, § 502. Life insurance proceeds held in or paid to the Trust are additionally exempt from creditors under M.G.L. c. 175, § 125.

12. PERPETUITIES AND TERMINATION

12.1 Rule against perpetuities. Every interest under this Trust must vest or terminate no later than the period permitted by the Massachusetts Uniform Statutory Rule Against Perpetuities, M.G.L. c. 184A — i.e., 21 years after the death of an individual alive when the interest was created, or within 90 years after creation.

12.2 Savings clause. Notwithstanding any other provision, the Trust shall terminate, and all property shall vest in the then-current Beneficiaries, no later than the last day permitted by c. 184A.

12.3 Termination. Upon the later of the perpetuities limit or distribution of all proceeds under Section 10, the Trustee distributes any remaining Trust Estate to the then-living Beneficiaries, or, if none, to Grantor's descendants per stirpes.

13. GENERATION-SKIPPING TRANSFER (GST) PROVISIONS

13.1 For multi-generational use, Grantor allocates GST exemption (26 U.S.C. §§ 2631, 2632) on a timely Form 709.
13.2 The Trustee maintains separate shares where advantageous to preserve an inclusion ratio of zero and consults counsel before any distribution that could trigger GST tax under § 2601.

14. GOVERNING LAW; TRUSTEE SUCCESSION

14.1 Governing law. The laws of the Commonwealth of Massachusetts, including the MUTC (c. 203E), without regard to conflict-of-laws rules.
14.2 Succession. Initial Trustee: [TRUSTEE NAME]. Successor: [SUCCESSOR TRUSTEE NAME]. Grantor shall never serve as Trustee. No Crummey Beneficiary shall serve as sole Trustee over his or her own interest. Adult Beneficiaries (by majority) may appoint an Independent successor if no named successor serves.

15. EXECUTION BLOCK

IN WITNESS WHEREOF, the parties have executed this Agreement as of the Effective Date.

NOTARY ACKNOWLEDGMENT
Commonwealth of Massachusetts, County of [COUNTY]. On [__/__/____], personally appeared [GRANTOR NAME] and [TRUSTEE NAME], who acknowledged this Agreement to be their free act and deed.

_______________________________
Notary Public — My commission expires: ____________

EIN of Trust (once obtained): [____________]

16. SCHEDULE A – INSURANCE POLICIES AND TRUST PROPERTY

17. EXHIBIT 1 – CRUMMEY NOTICE LETTER

[DATE]

To: [BENEFICIARY NAME] (or [PARENT/GUARDIAN] on behalf of minor [NAME])
Re: Right of Withdrawal — [TRUST NAME]

Dear [NAME]:

As Trustee, I notify you that on [__/__/____] a contribution of $[____] was made to the Trust. You have the right to withdraw your proportionate share, up to $[____] (the annual exclusion under IRC § 2503(b)).

Deliver a written demand to the Trustee at [ADDRESS] within [____] days of this notice (no later than [__/__/____]). If unexercised, the right lapses to the extent of the 5-and-5 limit (IRC § 2514(e)); any excess carries forward as a hanging power.

Sincerely,
_______________________________
[TRUSTEE NAME], Trustee

Acknowledgment: Received on [__/__/____]. _______________________________ (Beneficiary / Parent / Guardian)

SOURCES AND REFERENCES

Massachusetts Statutes:

• M.G.L. c. 203E — Massachusetts Uniform Trust Code — https://malegislature.gov/laws/generallaws/partii/titleii/chapter203e
• M.G.L. c. 203E, § 502 — Spendthrift provision — https://www.mass.gov/info-details/mass-general-laws-c203e-ss-502
• M.G.L. c. 184A — Uniform Statutory Rule Against Perpetuities (90-year)
• M.G.L. c. 175, § 125 — Exemption of life insurance proceeds
• M.G.L. c. 65C — Massachusetts estate tax ($2,000,000 filing threshold for deaths on/after Jan. 1, 2023; rate 0.8%–16%; no portability)

Federal Authority:

• 26 U.S.C. §§ 2035, 2042, 2503(b), 2514, 2601, 2631, 2632
• Crummey v. Commissioner, 397 F.2d 82 (9th Cir. 1968)
• IRS Forms 706, 709, 1041, SS-4