casemark/ilit

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