The Duties of an ILIT Trustee

What an ILIT trustee is

An irrevocable life insurance trust, or ILIT, is an estate-planning structure used to exclude life insurance proceeds from the insured’s taxable estate. ILITs also provide liquidity at death, protect assets from creditors, control how beneficiaries receive the proceeds, and support multi-generational wealth transfer. They are commonly chosen by individuals whose taxable estate exceeds the federal estate tax exemption, who live in a state with its own estate or inheritance tax, or whose estates hold illiquid assets that heirs would otherwise have to sell.

A properly structured ILIT excludes insurance proceeds by avoiding “incidents of ownership” as defined in §2042. The grantor of the trust may not serve as trustee. Acting as trustee is itself an incident of ownership, which would pull the policy back into the grantor’s estate and defeat the entire structure.

For an ILIT, the trustee is the legal policy owner and the administrator of the trust. The trustee is bound by fiduciary duties such as prudence, loyalty and impartiality. ILITs also carry specific administrative duties (premium funding, Crummey notices, and policy oversight), and a misstep in any of them can either lapse the policy or trigger unintended tax consequences.

Getting the policy into the trust

How a policy gets into a trust is largely shaped by §2035, which defines a clawback period for transfers made within three years of the decedent’s death. If the grantor transfers a life insurance policy to a trust and dies within three years of the transfer, the death benefit is pulled back into the grantor’s estate, defeating the §2042 exclusion the trust was designed to capture.

The cleaner path is for the trust to be funded with cash and a new policy to be issued directly to the trust. The trustee signs the application, and the trust is named as both owner and beneficiary from day one. Because the grantor never owned the policy, the §2035 clawback does not apply.

The alternative is to transfer an existing policy from the grantor to the trust. If the insured dies within three years of the transfer, §2035 pulls the death benefit back into the grantor’s estate. The clock starts on the date of the transfer.

Either way, the trustee should document the path used and, if the policy was transferred, calendar the date the three-year clock runs out.

The annual rhythm: premiums and Crummey notices

Insurance policies require premiums to be paid annually or the policy lapses. In an ILIT, the grantor does not pay the carrier directly. Instead, the grantor makes an annual cash contribution to the trust, which is a gift from the grantor to the trust’s beneficiaries. The trustee then pays the carrier. The grantor typically sizes the contribution so it stays under the §2503(b) annual gift tax exclusion ($19,000 per beneficiary in 2026).

However, the annual exclusion requires the beneficiaries of the trust to have a “present interest” in the gift, defined in Treas. Reg. §25.2503-3 as “an unrestricted right to the immediate use, possession, or enjoyment of property”. By default, trust contributions are future interests, not present interests. The fix is the Crummey power, named after Crummey v. Commissioner, 397 F.2d 82 (9th Cir. 1968), which established that a temporary withdrawal right converts a trust contribution into a present interest. The trustee sends a letter, known as a Crummey notice, to all beneficiaries, defining a 30 to 60 day window in which they may withdraw their share of the contribution.

The right of withdrawal does not have to be exercised. It just has to exist and be communicated. In practice, beneficiaries rarely withdraw, leaving the cash available to the trustee to pay the premium to the insurance carrier. The trustee must maintain strict recordkeeping discipline, including drafts of the notices, proof of mailing, and tracking the lapse of the withdrawal right each year. Crummey-notice files are one of the first things an IRS auditor will ask for on examination of an ILIT.

Ongoing oversight

Trustees of ILITs have several recurring monitoring obligations, and the specific duties depend on the type of policy. For term policies, the trustee tracks term length, premium increases, and conversion deadlines. For permanent policies (whole life, universal life), the trustee reviews annual statements, watches cash value adequacy, and confirms the projected funding still supports the death benefit.

An insurance policy is only as good as the carrier of the policy. A trustee must review carrier solvency and financial strength annually. This typically means examining ratings from A.M. Best, S&P, and Moody’s, the Comdex composite score, and the carrier’s NAIC Risk-Based Capital ratio. If the financial strength of the carrier deteriorates, the trustee must examine their options to exchange or replace the policy.

Beyond these ILIT-specific duties, the trustee also owes the standard fiduciary obligations of any trust, including regular beneficiary communication, formal accountings, and impartial administration.

Where ILIT trustees fail

ILIT administration can be straightforward in any given year, but reliably administering for decades is a harder problem. Two failure modes are particularly common. Crummey notices that were never sent or never documented fail on audit and convert what should have been annual-exclusion gifts into reportable taxable transfers. A premium that lapses, often when the grantor’s circumstances change and no one is watching the policy, can void the trust’s only meaningful asset.

A recent Tax Adviser case study (AICPA, April 2026) walks through a 1991 ILIT and highlights how ILIT administration can be more complicated than sending Crummey notices and paying premiums. In this case, annual premium contributions stayed under the gift tax exclusion for decades, so no gift tax returns (IRS Form 709) were filed because none were technically required.

The trust contained hanging Crummey powers, meaning each beneficiary’s annual withdrawal right did not fully expire when unused. The unexpired portion carried forward year over year. ILITs are often drafted this way because it avoids a separate gift tax problem when a withdrawal right lapses, but it creates a follow-on issue. In years where the hanging amount grew large enough, the trust failed the IRS’s “GST trust” definition under §2632(c)(3)(B) and stopped receiving the automatic generation-skipping transfer (GST) tax exemption allocations that would otherwise keep it tax-free for the grantor’s grandchildren.

Decades later, the trust was partially exempt and partially not, and the grantor did not have enough remaining GST exemption to fix it. The lesson is that filing Form 709 each year, even when no gift tax is owed, lets the grantor manually allocate GST exemption and avoid additional taxes.

Who serves well as trustee

A grantor may not serve as a trustee. Doing so would retain an “incident of ownership” over the policy under §2042, and the death benefit would be pulled back into the grantor’s estate. Similarly, a non-grantor who is the insured serving as trustee over a policy on their own life is treated as having incidents of ownership. A spouse could technically serve as a trustee, but it is heavily disfavored because of edge cases that can pull the proceeds into the spouse’s estate at death. A beneficiary may serve as trustee, but the trust agreement must limit the beneficiary-trustee’s distribution power over their own share to an ascertainable standard (health, education, maintenance, or support) under §2041(b)(1)(A), or the entire trust corpus becomes includible in the beneficiary’s own estate as a general power of appointment.

Many ILITs name an individual trustee, usually a sibling, adult child, or close friend. That works when the person has time, attention to detail, and the longevity to run the annual cycle for what may be a thirty- or forty-year administration. The friction points are exactly the ones the prior sections cover: Crummey-notice discipline, audit-ready records, impartiality, and continuity if the trustee becomes unable or unwilling to serve.

A chartered trust company addresses these frictions through institutional continuity, documentation systems built for audit, fiduciary insurance, and regulatory oversight. The tradeoffs are a fee tied to trust value and the loss of family discretion in day-to-day decisions.

A common middle path is a co-trustee arrangement. The individual holds discretionary distribution authority, while a corporate co-trustee handles the administrative duties such as Crummey notices, premium payments, and recordkeeping. The arrangement preserves family judgment on distributions while institutionalizing the recurring administrative work.

For trustee selection in other irrevocable trust contexts, see our analyses of rabbi trusts and QSBS trust administration.

The takeaway

An ILIT only delivers the estate tax exclusion if the trustee does the work. Decades of small lapses can quietly undo what the trust agreement was drafted to capture. American Estate & Trust is a Nevada-chartered trust company regulated by the Nevada Financial Institutions Division. If you are evaluating corporate trustee options for an ILIT, reach out and we can talk through what would fit.