Does Your Life Insurance Trust Need a Checkup?

As a part of our estate planning process, we work with many individuals and families who established an Irrevocable Life Insurance Trust (commonly known as an “ILIT”) many years ago. While reviewing an existing estate plan, occasionally we discover that some of the formalities associated with the ILIT have not necessarily been followed by the family or trustee of the ILIT as recommended. Therefore, we wanted to provide this list of Frequently Asked Questions as a “checkup” for any ILIT that you or your family may have in place:

1. Why do I have a Life Insurance Trust?

The death benefit proceeds from a life insurance policy that you own in your name can be subject to State and Federal estate taxes upon your death. One way to keep the death benefit of a life insurance policy outside of your taxable estate at your death is to establish an ILIT. By creating an ILIT and following certain formalities established by the IRS, the proceeds of a life insurance policy owned by an ILIT will not be subject to estate taxation on the death of the insured.

2. Should my Life Insurance Trust have its own taxpayer identification number?

Yes – an ILIT is treated as a separate entity and therefore must have its own separate taxpayer identification number (sometimes called an “EIN” or “FEIN”). All policies purchased in the name of the ILIT or transferred to the ILIT should reference the ILIT’s taxpayer identification number (and not the insured’s social security number) on the Ownership and Beneficiary forms for the life insurance policy. You should have received a copy of the taxpayer identification number in the mail from the IRS or from your attorney at the time you established the ILIT.

3. Should my Life Insurance Trust have its own bank account?

Yes – the recommended practice is to open a checking account in the name of the ILIT. You will use the ILIT’s taxpayer identification number for the ILIT checking account. The checking account is used to pay the premiums for the life insurance policy, as discussed directly below. We occasionally hear from families that they did not establish a separate checking account for the ILIT or that they are paying the life insurance premiums directly from their personal checking account -- this is not recommended as it can result in the life insurance policy being included in your gross estate and subject to estate taxes, therefore defeating the purpose of establishing an ILIT.

4. How should I be paying the life insurance premiums for my Life Insurance Trust?

The ILIT (which owns the insurance policy) is responsible for making the insurance premium payments; therefore, the individual (or owner of the policy) should not pay the life insurance premiums directly. However, the ILIT checking account must receive a “gift” from the insured in order to pay the life insurance premiums. Therefore, the best practice is for the insured party to write a check to the ILIT in the amount of the premium at the time the premium is due. The Trustee then deposits the check into the ILIT checking account, and the Trustee then pays the premium from the ILIT checking account. Even though the payment of the life insurance premiums involves a few extra steps, this provides a good paper trail of the contributions (i.e., “gifts”) to the ILIT and the IRS has “blessed” this approach.

5. Do I need to document the payment of the life insurance premiums (“Crummey Notices”) each year?

Yes – the Crummey Notices (also known as Right of Withdrawal letters) are essential to the ILIT as the payment of premiums by the insured as described above is considered a “gift” to the ILIT and requires proper notice to the trust beneficiaries to both document and qualify the gift for the annual gift tax exclusion. For many individuals, the entire premium payment of policies owned by the ILIT can be covered by annual gift exclusions (avoiding the use of the lifetime estate tax exemption or gift tax). With the current annual gift tax exclusion of $15,000 per donee (the person receiving the gift), an insured could gift $15,000 to each beneficiary of an ILIT without the need to file a gift tax return (if you are married, you can gift twice that amount per beneficiary of an ILIT provided your spouse agrees to split the gifts).

The “Crummey Notice” letters provide formal written notice to the beneficiaries of the ILIT of the right of each beneficiary to withdraw funds from the ILIT when the insurance premium is paid and allow for the acknowledgment by the beneficiary of that right as required by the IRS. Each time the Trustee pays the life insurance premium on behalf of the ILIT, a Crummey Notice should be sent by the Trustee to each beneficiary of the ILIT and signed by each beneficiary. The signed Crummey Notices should then be kept in the insured’s files indefinitely. Because of the extra step involved, we typically recommend annual premium payments be selected so that the Crummey Notices need only be sent once per year per policy.

Record-keeping is very important with an ILIT, and there is a specific format to the Crummey Notices. If you cannot locate the template or form of Crummey Notice prepared by an attorney for you at the time you established your ILIT, or if the Trustee has not been preparing Crummey Notices each year for the trust beneficiaries to sign, please contact our office.

6. Who should be named as the beneficiary of my life insurance policy?

If you have purchased your life insurance policy in the name of the ILIT or transferred the life insurance policy to the ILIT, you should confirm with your life insurance agent that your ILIT is named as the primary beneficiary of the life insurance policy. The typical beneficiary designation would look something like: “John Smith, Trustee of the Jane Doe Irrevocable Trust dated January 1, 2021.” If your ILIT is listed as the “Owner” of the life insurance policy but is not named as the beneficiary, please contact us immediately.

7. What is the difference between the “Insured,” the “Owner,” and the “Beneficiary,” and how should each be listed on my life insurance policy if I have an ILIT?

With life insurance, the policy covers a person’s life. This person is known as the “Insured.”

With an ILIT, the Trust should be listed as the “Owner,” as the owner holds the coverage on the insured’s life.

In addition to being listed as the “owner,” the ILIT should also be the “Beneficiary” as the Trust will receive the death benefit (the money that is paid out by the life insurance company) when the insured dies.

8. Am I required to file any tax returns related to my Life Insurance Trust?

It depends. Most ILITs do not have taxable income and therefore do not require an income tax return. In terms of gift tax reporting, if you transferred an existing life insurance policy to the ILIT, a gift tax return may be required to inform the IRS of the transfer (gift) of the life insurance policy to the ILIT. If you purchased a new policy in the name of the ILIT, you should provide your estate planning attorney or accountant information regarding the amount of the annual premium in order to determine whether you must file a Gift Tax Return (IRS Form 709). It is also imperative that you discuss with your tax advisor whether or not you should be allocating a portion of your generation-skipping tax (“GST”) exemption to the trust to avoid the potential imposition of a generation-skipping tax at a later date.

9. I don’t have a life insurance trust but found this article fascinating! Should I consider establishing a Life Insurance Trust for my family?

ILITs are a popular estate planning technique for families who may have a Federal or Illinois estate tax liability in the future upon their death. Currently, an individual can shelter $11,700,000 from the Federal estate tax, but only $4,000,000 from the Illinois estate tax (applicable to Illinois residents but also to non-residents who own real estate in Illinois). The Federal estate tax rate is 40%, and the Illinois estate tax rate ranges from 10%-28%. Since the death benefit of life insurance owned by an individual is subject to estate tax, many families opt to have the life insurance policy owned by an ILIT to provide an immediate source of payment (i.e., liquidity) in the event of an estate tax while also completely removing the life insurance proceeds from estate taxation. The ILIT structure is an extremely useful and valuable technique for business owners as it can help a family avoid having to sell a business or other high-value assets to cover estate tax liabilities (which are due 9 months after the insured’s death).

It’s worth mentioning that the Federal estate tax exemption amount of $11,700,000 is temporary – this figure is set to revert back to the prior limit of $5,000,000 in January of 2026; additionally, Congress may reduce the Federal estate tax exemption any time prior to 2026. ILITs, therefore, remain an effective estate planning technique to shield life insurance proceeds from estate taxes and can greatly benefit a family who may have a potential estate tax liability upon death.

If you have any questions about your own ILIT or want to establish an ILIT for your family, please call any member of our estate practice group at 630-655-6000 or email


Written by: Michelle Hanlon

Categories: Firm News, Publications