What is an Irrevocable Life Insurance Trust (ILIT) and how does it work?

An Irrevocable Life Insurance Trust (ILIT) is an advanced estate tax planning tool for clients whose assets exceed $9 million. The ILIT owns and is the Primary Beneficiary of your life insurance policy — rather than an individual or Revocable Living Trust — which removes the proceeds from your taxable estate and avoids Washington State Estate Tax on those proceeds. An ILIT is part of the overall Estate Tax Plan. The Trust is irrevocable and cannot be changed once created; if the life insurance policy owned by the ILIT lapses, the Trust becomes moot. Key benefits: • Life insurance proceeds are excluded from your taxable estate • Proceeds pass income-tax-free to beneficiaries • The ILIT can be structured to provide liquidity to pay estate taxes without including the proceeds in the taxable estate • Protects the proceeds from the beneficiaries' creditors Cost: $3,000 via Zelle (covers an ILIT for each spouse's life insurance policies regardless of how many policies each spouse owns). The $3,000 price reflects the irrevocability, complexity, risk, and enormous potential Estate Tax savings — potentially in the millions of dollars. Note: No Washington Estate Tax is due on the first $3 million (as of July 1, 2026). The $1,500 Estate Tax Plan triples the exemption to $9 million for married couples. The ILIT is the next step for estates above $9 million.

What is the "Crummey Power" and why is it required in an ILIT?

A Crummey Power (named after the 1968 Tax Court case Crummey v. Commissioner) is a provision in an ILIT that gives beneficiaries a temporary right to withdraw contributions made to the trust — typically for 30 days after each contribution. Why it is required: Without a Crummey Power, premium payments made to the ILIT to fund the life insurance policy would be treated as taxable gifts of a future interest — which do not qualify for the annual gift tax exclusion ($19,000 per recipient in 2026). With a Crummey Power, the contributions qualify as gifts of a present interest and can be sheltered by the annual exclusion. In practice: Beneficiaries almost never exercise the withdrawal right — doing so would defeat the purpose of the trust. But the IRS requires that the right be real and that beneficiaries receive written notice of each contribution and their withdrawal right.

How does an ILIT provide liquidity to pay estate taxes?

One of the most practical uses of an ILIT is providing liquidity to pay estate taxes without increasing the taxable estate. The problem: Washington State Estate Tax is due within nine months of death. If most of the estate's value is tied up in illiquid assets — real estate, a closely held business, or investment accounts — the estate may not have enough cash to pay the tax without a forced sale at an unfavorable price. The ILIT solution: 1. The ILIT owns a life insurance policy on the grantor's life 2. At the grantor's death, the ILIT receives the insurance proceeds income-tax-free 3. The ILIT can then loan money to the estate or purchase assets from the estate — providing the cash needed to pay estate taxes without a forced sale 4. Because the ILIT owns the policy (not the grantor), the proceeds are not included in the taxable estate This strategy is particularly valuable for estates with significant real estate holdings or closely held business interests.

What happens if I already own a life insurance policy — can I transfer it to an ILIT?

Yes — but there is an important three-year rule to be aware of. If you transfer an existing life insurance policy to an ILIT, and you die within three years of the transfer, the IRS will pull the policy proceeds back into your taxable estate under IRC § 2035. This is called the 'three-year rule' or the 'contemplation of death' rule. To avoid this trap: • Have the ILIT apply for and own a new policy from the beginning — the three-year rule does not apply to policies the ILIT purchased directly • If you must transfer an existing policy, plan for the three-year waiting period before the transfer is fully effective for estate tax purposes Practical note: For clients who are uninsurable or who have existing policies they want to protect, Christopher can advise on the best approach given your specific circumstances.

How does an ILIT fit into the overall Washington Estate Tax plan?

The Washington Estate Tax plan has three tiers: Tier 1 — $3 million per person ($6 million per couple): The basic Washington State Estate Tax exemption. No planning required — the first $3 million per person passes free of Washington Estate Tax. Tier 2 — Up to $9 million per couple ($1,500 via Zelle): The Disclaimer Sub-Trust and Separate Property Trust structure triples the exemption from $3 million to $9 million for married couples. This is the most cost-effective estate tax planning available. Tier 3 — Above $9 million ($3,000 via Zelle for the ILIT): For estates above $9 million, the ILIT removes life insurance proceeds from the taxable estate. Combined with the Tier 2 planning, the ILIT can shelter an additional $3–5 million or more from Washington Estate Tax — potentially saving hundreds of thousands of dollars in tax.

Christopher S. Mulvaney, Esq. — Attorney-and-Counselor-at-Law — Professionalism with Integrity — WSBA#33595 — Licensed Only in Washington State

[email protected]Bellevue, WA

Irrevocable Life Insurance Trusts (ILIT)

Trusts Overview

Estate Tax Planning Above $9 Million

Remove life insurance proceeds from your taxable estate — potentially saving millions.

An Irrevocable Life Insurance Trust (ILIT) removes life insurance proceeds from your taxable estate — potentially saving millions in Washington State Estate Tax for clients whose assets exceed $9 million. The ILIT owns and is the Primary Beneficiary of your life insurance policy, which removes the proceeds from your taxable estate and avoids Washington State Estate Tax on those proceeds.

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