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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 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

At death

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

Taxes paid

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.

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