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.
Donor (Insured)Creates irrevocable trustIncludes Crummey withdrawal provision (allows beneficiaries to withdraw payments made to the trust)Names independent trusteeMakes gifts for premium paymentsFiles GSTT and/or gift tax returns, if necessaryReports trust income on personal annual income tax return*
TrustTrust or trustee buys and owns policy on life of insuredServes proper Crummey notice to the beneficiariesPays premiums on policy
BeneficiariesDo not actually exercise their Crummey withdrawal rights
Decedent’s (Insured’s) Taxable Estate(does not include proceeds of insurance policies owned by the ILIT)Executor:Settles estatePays estate taxesDistributes remaining assets to beneficiaries
TrustReceives proceeds of policyDistributes proceeds according to terms of trust
BeneficiariesReceive distributions from ILIT free of estate taxesReceive remaining assets from decedent’s taxable estate net of estate taxes
* ILIT is generally created as a grantor trust taxable to the donor/grantor.