Irrevocable Life Insurance Trust for Single Individual
(Trusts for Children) (IL)

Summary

This template is an irrevocable life insurance trust (ILIT) designed for use by an unmarried individual in Illinois. A settlor would use an ILIT to hold life insurance policies on their life in order to prevent the proceeds from being includible in the settlor's taxable estate on death. This template contains practical guidance, drafting notes, alternate clauses, and optional clauses. An ILIT is an irrevocable trust established to be the beneficiary of a life insurance policy. If the premiums are gifted to the trust, then the life insurance proceeds will not be included in the settlor's estate for federal estate tax. There is a common misconception that life insurance proceeds are not subject to federal estate taxes. While the proceeds are free from income tax, they are countable as part of settlor's taxable estate. An ILIT can be created specifically for the purpose of owning the settlor's life insurance policy. The ILIT holds the policy outside of the settlor's estate and keeps the proceeds from being taxable to the settlor's estate. The proceeds can then be used to provide the settlor's estate with the liquidity to pay estate taxes, pay off debts, pay final expenses, and provide income to the settlor's children. The settlor can use their annual gift tax exclusion to make cash gifts to the trust, and pay the premium on the life insurance policy. In addition, during the settlor's lifetime, the settlor's children have "Crummey" powers to withdraw gifts made to the trust. These withdrawal rights are designed to qualify any gifts made to the trust (i.e., funds to pay premiums on the insurance policies) for the annual gift tax exclusion. See I.R.C. § 2503(b) and Crummey v. Comm'r., 397 F.2d 82 (9th Cir. 1968). On the death of the settlor, the trustee is directed to collect the insurance proceeds and divide the trust into separate trusts for the settlor's children. The trust is administered for each child until they attain 30 years of age. During the trust's term, the trustee has the discretion to distribute net income and principal to the settlor's children. This irrevocable insurance trust is most suitable for clients who may have a taxable estate and who desire to provide for their children or other beneficiaries with the proceeds of the insurance policies transferred to the trust. For more information on the estate taxation of life insurance policies, see Life Insurance and Estate Taxation. For an in-depth discussion of trusts, see the practice notes Characteristics and Uses of Trusts (IL) and Requirements and Restrictions on Trust Purposes and Administration (IL).