Irrevocable Life Insurance Trust (ILIT) Drafting Workflow

You are tasked with drafting a comprehensive Irrevocable Life Insurance Trust (ILIT) document that complies with federal tax law requirements under IRC Section 2042 and applicable state trust law. This transactional document must be precise, legally sound, and tailored to the client's specific circumstances while incorporating industry-standard provisions.

Initial Information Gathering and Verification

Begin by thoroughly reviewing any uploaded client documents to extract essential information including the grantor's full legal name, contact information, tax identification details, and the specific life insurance policies to be transferred into the trust. Identify the proposed trustee and any successor trustees, along with all primary and contingent beneficiaries. Search for policy numbers, face amounts, insurance carriers, and current ownership details. If client information is incomplete, note the gaps that require clarification before proceeding with the draft.

Verify the current state law requirements for trust formation and execution in the jurisdiction where the trust will be established. Research the specific formalities required for valid trust creation, including witness requirements, notarization standards, and any state-specific provisions regarding irrevocable trusts. Confirm whether the chosen jurisdiction recognizes and enforces Crummey withdrawal rights and how local law treats spendthrift provisions.

Document Structure and Core Provisions

Draft the Declaration of Trust section with precise language establishing the irrevocable nature of the trust and its primary purpose of holding life insurance policies outside the grantor's taxable estate. The declaration must explicitly state that the grantor relinquishes all incidents of ownership in the transferred policies to satisfy IRC Section 2042 requirements. Include clear language that the trust is irrevocable and cannot be amended, modified, or revoked by the grantor, with only limited exceptions for administrative corrections or changes that do not benefit the grantor.

Prepare the Grantor and Trustee Information section identifying all parties with complete legal names and addresses. Specify the initial trustee's acceptance of fiduciary duties and outline the succession mechanism for replacement trustees. Include provisions addressing trustee resignation, removal for cause, and appointment procedures for successor trustees. Ensure the grantor is not named as trustee and has no retained powers that would cause estate inclusion under IRC Sections 2036, 2038, or 2042.

Detail the Trust Property and Life Insurance Policies section by specifically describing each policy being transferred, including policy numbers, insurance carriers, face amounts, and insured individuals. Include language effectuating the transfer of all ownership rights from the grantor to the trustee, and specify the procedure for transferring additional policies in the future. Address whether existing policies are being transferred (noting the three-year lookback rule under IRC Section 2035) or whether the trust will apply for and own new policies from inception.

Tax Compliance and Funding Mechanisms

Incorporate comprehensive Funding and Gift Provisions that establish the mechanism for annual premium payments through Crummey withdrawal rights. Draft specific language granting beneficiaries the temporary right to withdraw their pro-rata share of annual contributions (limited to the annual gift tax exclusion amount under IRC Section 2503(b), currently $18,000 per beneficiary for 2024). Include detailed procedures for providing timely written notice to beneficiaries of their withdrawal rights, specifying the notice period (typically 30 days) and the method of delivery. Address how the withdrawal right lapses and the consequences of non-exercise, ensuring the lapse does not create additional gift tax issues under the "5 and 5" power rules.

Research and incorporate current IRS guidance on Crummey notice requirements and acceptable formats. Verify that the withdrawal rights are structured to qualify contributions as present interest gifts eligible for the annual exclusion. Include provisions addressing what happens if beneficiaries are minors, incapacitated, or otherwise unable to exercise withdrawal rights, potentially incorporating guardianship or representation provisions.

Trustee Powers and Administrative Provisions

Draft an extensive Trustee Powers and Duties section granting the trustee comprehensive authority to manage the trust property effectively. Include specific powers to pay insurance premiums when due, change beneficiary designations on policies (subject to trust terms), borrow against policy cash values, surrender policies if appropriate, convert term policies to permanent insurance, and exercise all other incidents of ownership. Grant investment powers for any cash or securities held in the trust, including the authority to invest in a diversified portfolio pending distribution.

Specify the trustee's fiduciary duties including the duty of loyalty, duty of impartiality among beneficiaries, duty to preserve trust property, and duty to provide accountings. Address trustee compensation, indemnification for good faith actions, and the standard of care required (whether prudent investor rule or another standard). Include provisions allowing the trustee to hire professionals including attorneys, accountants, and investment advisors, with authority to pay their fees from trust assets.

Distribution Provisions and Beneficiary Protections

Prepare the Distributions Upon Death section with clear instructions for how death benefit proceeds will be distributed. Specify whether proceeds will be paid outright to beneficiaries, held in continuing sub-trusts for minor or incapacitated beneficiaries, or distributed according to a specific schedule. Include per stirpes distribution language if benefits should pass to descendants of deceased beneficiaries. Address the tax-free nature of life insurance proceeds under IRC Section 101(a) and confirm that proper trust structure prevents inclusion in the grantor's estate under IRC Section 2042.

Incorporate robust spendthrift provisions protecting trust assets from beneficiaries' creditors and preventing beneficiaries from assigning or pledging their interests before distribution. Research state-specific requirements for enforceable spendthrift clauses and include any mandatory language. Consider including discretionary distribution standards if the trustee should have flexibility in timing or amounts of distributions based on beneficiary needs.

Technical Provisions and Execution Requirements

Draft the Beneficiaries section with complete identification of all primary beneficiaries including full legal names, dates of birth, and relationships to the grantor. Specify contingent beneficiaries and the order of succession if primary beneficiaries predecease the insured. Address simultaneous death scenarios and include a survivorship requirement (typically 30-60 days) to avoid probate complications. If any beneficiaries are minors, include provisions for custodial management or sub-trust creation until they reach a specified age.

Prepare the Governing Law and Miscellaneous Provisions section specifying which state's laws govern the trust's validity, construction, and administration. Include a severability clause ensuring that if any provision is found invalid, the remainder of the trust continues in effect. Add a merger clause stating the document represents the complete agreement. Include provisions addressing how notices should be provided to beneficiaries and other parties, specifying acceptable methods and addresses.

Create the Signatures and Notarization section with appropriate signature blocks for the grantor (as settlor), the trustee (accepting appointment), and any required witnesses. Research the specific execution requirements in the governing jurisdiction, including how many witnesses are required, whether they must be disinterested parties, and whether notarization is mandatory or merely advisable. Include attestation language for witnesses and a proper notarial certificate with venue and acknowledgment language compliant with state law.

Final Document Assembly and Quality Control

Before finalizing the document, verify that all cross-references are accurate, defined terms are used consistently throughout, and numbering/lettering sequences are correct. Confirm that the trust includes all necessary provisions to achieve the client's estate planning objectives while maintaining compliance with federal tax law requirements for estate exclusion. Ensure the irrevocability language is unambiguous and that the grantor retains no powers or benefits that would cause estate inclusion.

Review the document for internal consistency, checking that beneficiary designations align throughout all sections, trustee powers are comprehensive but not contradictory, and distribution provisions clearly express the grantor's intent. Verify that all state-specific requirements have been incorporated and that the document is ready for execution according to local formalities.

Once all necessary information has been gathered, legal research completed, and provisions properly drafted, create the final ILIT document incorporating all findings, client-specific details, and legally compliant language. The completed document should be professionally formatted, include a table of contents if lengthy, and be ready for attorney review and client execution.