How an Irrevocable Life Insurance Trust (ILIT) Works

An ILIT is a trust that is funded by a life insurance policy or life insurance proceeds. If properly structured, an ILIT can help minimize gift and estate taxes.

During life

Donor (Insured)

Creates irrevocable trust
Includes Crummey withdrawal provision (allows beneficiaries to withdraw payments made to the trust)
Names independent trustee
Makes gifts for premium payments
Files GSTT and/or gift tax returns, if necessary
Reports trust income on personal annual income tax return

Trust

Trust or trustee buys and owns policy on life of insured
Serves proper Crummey notice to the beneficiaries
Pays premiums on policy

Beneficiaries

Do not actually exercise their Crummey withdrawal rights

At death

Decedent's (Insured's) Taxable Estate
(does not include proceeds of insurance policies owned by the ILIT)
Executor:

Settles estate
Pays estate taxes
Distributes remaining assets to beneficiaries

Trust

Receives proceeds of policy
Distributes proceeds according to terms of trust

Taxes paid

Beneficiaries

Receive distributions from ILIT free of estate taxes
Receive remaining assets from decedent's taxable estate net of estate taxes

Stern, Kory, Sreden & Morgan, AAC
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