Why an Irrevocable Life Insurance Trust (ILIT) Matters
An ILIT removes a life‑insurance policy from the taxable estate, ensuring that beneficiaries receive the death benefit free from estate taxes and probate. It also protects the policy from creditors and gives the grantor control over policy ownership while relinquishing personal ownership rights.
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Key Components of a Sample ILIT Agreement
The agreement typically contains the following sections:
- Parties: Grantor, trustee, and beneficiaries.
- Trust Purpose: Clarifies the ILIT's role in estate planning.
- Policy Ownership: Confirms that the trustee holds legal title to the policy.
- Beneficiary Designations: Lists primary and contingent beneficiaries.
- Trustee Powers and Duties: Defines the trustee's authority to manage the policy and invest premium proceeds.
- Funding Instructions: Details premium payment schedule and source of funds.
- Distribution Terms: Specifies how the death benefit is paid to beneficiaries.
- Revocation Provisions: Explicitly states the irrevocable nature of the trust.
- Governing Law: Identifies the jurisdiction governing the trust.
Sample ILIT Agreement Template
The following is a concise, editable template suitable for legal counsel review before execution:
| Section | Content |
|---|---|
| 1. Parties | Grantor: [Name], Trustee: [Name], Beneficiaries: [Names] |
| 2. Trust Purpose | This irrevocable life insurance trust ("ILIT") is established to hold a life‑insurance policy issued by [Insurer] in the amount of [Policy Value] to provide a tax‑efficient death benefit to the beneficiaries. |
| 3. Policy Ownership | The Trustee shall be the sole legal owner of the policy, holding title in trust for the beneficiaries. |
| 4. Beneficiary Designations | Primary Beneficiary: [Name]; Contingent Beneficiary: [Name]. |
| 5. Trustee Powers and Duties | The Trustee may (a) purchase and maintain the policy, (b) invest premium proceeds, and (c) make policy changes consistent with the trust's purpose. |
| 6. Funding Instructions | Premiums shall be paid annually on [Date] from the Grantor's account or from the trust's invested assets. |
| 7. Distribution Terms | Upon the Grantor's death, the Trustee shall deliver the death benefit directly to the beneficiaries as specified in Section 4. |
| 8. Revocation Provisions | This trust is irrevocable. No party may amend or revoke this agreement without the unanimous written consent of the Trustee and all beneficiaries. |
| 9. Governing Law | This agreement shall be governed by the laws of the State of [State]. |
Execution and Record‑Keeping
After signing, the trust must be recorded with the state if required, and the policy's ownership documents should be updated to reflect the trustee as the legal owner. The trustee should maintain a detailed ledger of premium payments, policy statements, and beneficiary communications to ensure transparency and compliance with fiduciary duties.
Common Pitfalls to Avoid
• Retaining Personal Ownership: If the grantor retains policy ownership, the benefit may still be taxable.
• Inadequate Funding: Failing to fund premiums on time can lead to policy lapses and loss of tax advantages.
• Improper Beneficiary Designation: Mislabeling beneficiaries or not updating them after life events can create disputes.
When to Use an ILIT
Consider an ILIT when the life‑insurance proceeds exceed the estate's exemption threshold, when you need creditor protection, or when you want to provide a tax‑efficient legacy to heirs without probate complications.