ilit

name	ilit
description	Drafts an Irrevocable Life Insurance Trust (ILIT) compliant with IRC § 2042 and state trust laws to exclude life insurance from the grantor's taxable estate. Covers Crummey withdrawal rights, trustee powers, distributions, and execution formalities. Use when drafting ILITs, life insurance trusts, estate tax exclusion trusts, or Crummey trusts.

Irrevocable Life Insurance Trust (ILIT)

Drafts a comprehensive ILIT that removes life insurance proceeds from the grantor's taxable estate under IRC § 2042 while preserving annual gift tax exclusions via Crummey powers.

Prerequisites

Collect before drafting:

1. Grantor — full legal name, SSN/TIN, domicile state
2. Policy info — carrier, policy number(s), face amount(s), insured, current ownership, term vs. permanent
3. Trustee — initial trustee (NOT grantor), successor(s), corporate trustee if any
4. Beneficiaries — primary and contingent with DOBs, relationships; minor sub-trust termination ages
5. Funding plan — existing policy transfer vs. trust-applied new policy; annual premium amount
6. Jurisdiction — state of trust situs; execution formalities (witnesses, notarization)
7. Existing estate plan — coordination with will, revocable trust, other ILITs

Drafting Workflow

Article I — Declaration of Trust

• State irrevocability explicitly — no amendment, modification, or revocation by grantor
• Purpose: hold life insurance outside grantor's taxable estate
• Grantor surrenders ALL incidents of ownership per IRC § 2042
• No retained powers under IRC §§ 2036, 2038, or 2042

Article II — Parties

• Grantor and trustee: full legal names, addresses, fiduciary acceptance
• Succession: resignation procedure, removal for cause, appointment mechanism
• Grantor must NOT serve as trustee or retain trustee-removal-and-replacement power — constitutes an incident of ownership

Article III — Trust Property & Policy Transfer

• Schedule A: each policy with carrier, number, face amount, insured
• Assignment language transferring all ownership rights to trustee
• Procedure for future policy additions
• § 2035 three-year rule: existing policy transfers trigger lookback — if grantor dies within 3 years, proceeds included in estate. Document transfer date prominently.
• New policies: trust applies and owns ab initio (no § 2035 issue)

Article IV — Crummey Withdrawal Rights

Crummey notice template:

To: [Beneficiary Name]
Date: [Date of Contribution]
Amount: $[Amount] contributed to [Trust Name]
You have the right to withdraw $[pro-rata share].
This right expires [30/45] days from this notice date.
If not exercised, the right lapses automatically.
— [Trustee]

Parameter	Standard
Annual exclusion	IRC § 2503(b) per beneficiary [VERIFY current year amount]
Notice period	30 days minimum; 45 days recommended
Notice method	Written, delivered personally or by mail
Lapse limitation	"5 and 5" safe harbor — lapse limited to greater of $5,000 or 5% of trust corpus
Minors	Guardian or legal representative receives notice

Article V — Trustee Powers & Duties

Grant powers to:

• Pay premiums when due
• Exercise policy rights (loans, conversions, surrenders, beneficiary changes per trust terms)
• Invest non-insurance assets under prudent investor standard
• Hire professionals; pay from trust
• Borrow against cash value; convert term to permanent
• Settle claims with carriers

Fiduciary standards: loyalty, impartiality, preservation, accounting. Specify compensation, indemnification for good faith, annual accounting to beneficiaries.

Article VI — Distributions

Upon death of insured:

• Outright distribution vs. continuing sub-trusts per beneficiary class
• Per stirpes for predeceased beneficiaries
• Survivorship requirement: 30–60 days
• Simultaneous death provision (USDA/RUDA or state equivalent)

Minors/incapacitated:

• Sub-trust until specified age (e.g., staged: 1/3 at 25, 1/2 remainder at 30, balance at 35)
• HEMS discretionary distributions (health, education, maintenance, support)

Proceeds are income-tax-free under IRC § 101(a); confirm structure prevents estate inclusion under § 2042.

Article VII — Spendthrift & Creditor Protection

• No assignment, pledge, or encumbrance of interests before distribution
• Assets not subject to beneficiary creditors, divorce, or bankruptcy
• Include state-specific mandatory spendthrift language

Article VIII — General Provisions

• Governing law, severability, merger/integration
• Notice provisions, trust situs with ability to change
• Rule against perpetuities savings clause (or note if jurisdiction abolished RAP)

Article IX — Execution

• Grantor signature (as "Settlor" or "Grantor")
• Trustee signature (acceptance of appointment)
• Witnesses — number varies by state (typically 2 disinterested)
• Notarization — mandatory in most states; include acknowledgment certificate

Critical Checks

• Never name grantor as trustee — any incident of ownership causes estate inclusion under § 2042
• Never give grantor power to change beneficiaries, borrow against policies, or surrender — these are incidents of ownership
• Document Crummey notices meticulously — IRS scrutinizes; keep copies with trust records
• Flag § 2035 risk prominently for existing policy transfers
• Verify state requirements — formation formalities, spendthrift enforceability, witness/notary rules, RAP status
• Coordinate with existing estate plan — ILIT beneficiary designations must not conflict with will or revocable trust
• GST tax — if beneficiaries include skip persons, address allocation under IRC § 2642
• Community property states — both spouses may need to consent to policy transfer
• Annual review — recommend periodic review of policy performance, beneficiary designations, and Crummey compliance
• All statutory citations are to the IRC; verify current thresholds at time of drafting