Getting Started with a Generational Wealth Plan

Setting up an Irrevocable Life Insurance Trust (ILIT) is one of the most powerful estate planning tools for someone in your position. It can shelter life insurance proceeds from estate taxes, protect beneficiaries, and ensure control over how funds are distributed. Here’s a structured breakdown:

🔹 What an ILIT Is

An Irrevocable Life Insurance Trust (ILIT) is a trust you create to own your life insurance policy.

• Once established, you cannot change or revoke it (hence “irrevocable”).

• The trust, not you, is the policy owner and beneficiary.

• At your passing, the death benefit is paid into the trust — outside your estate — avoiding estate tax inclusion and protecting the proceeds.

🔹 Steps to Create an ILIT

1. Work with an Estate Planning Attorney

• ILITs are legal instruments — the wording must be precise to avoid IRS issues.

• The attorney drafts the trust agreement, naming the trustee (not you) and the beneficiaries (e.g., your wife, daughter, or grandchildren).

2. Select a Trustee

• The trustee manages the trust.

• You cannot serve as trustee (to keep assets out of your estate).

• Common choices: a trusted family member, a professional trustee, or an attorney.

3. Draft the Trust Terms

• Specify how the proceeds will be used (e.g., for your spouse’s lifetime income, for your daughter’s inheritance, or education funds for grandchildren).

• Outline distribution rules, lump sums, installments, or discretionary distributions.

4. Fund the ILIT

Two ways:

1. Transfer an existing policy → The ILIT becomes the owner.

   • Caution: If you die within 3 years of the transfer, the IRS can “pull back” the policy into your estate.

2. Have the ILIT purchase a new policy → Best method to avoid the 3-year rule.

5. Annual Gifting to Pay Premiums

• You gift money to the ILIT each year, allowing the trustee to pay premiums.

• Typically, this is structured under the Crummey power, which grants beneficiaries a short-term right to withdraw the gift. This makes the gift qualify for the annual gift tax exclusion (currently $18,000 per beneficiary in 2025).

6. Trust Administration

• The trustee sends Crummey notices to beneficiaries.

• Trustee pays premiums from gifted funds.

• Upon your death, the trustee collects the death benefit and distributes it per the trust terms.

🔹 Benefits of an ILIT

• Estate tax protection: Keeps policy proceeds outside your taxable estate.

• Control: Dictates how and when beneficiaries receive funds.

• Asset protection: Shields proceeds from creditors or mismanagement by heirs.

• Liquidity for estate: Can provide cash to pay estate expenses (trust can loan to estate or buy estate assets).

🔹 Key Considerations

• Once created, you cannot change beneficiaries or reclaim the policy.

• Your wife or daughter can be beneficiaries but not trustees (if they have too much control, IRS could treat it as part of your estate).

• An ILIT is usually best for people with large estates or with specific legacy planning goals (sounds like this matches your situation).