An irrevocable life insurance trust (ILIT) can be a powerful tool for preserving life insurance proceeds outside of an estate and providing for loved ones in a thoughtful way. At the Law Offices of Robert P. Bergman, we assist clients in San Luis Obispo County and beyond in designing ILITs that align with family dynamics, financial goals, and long-term planning needs. This overview introduces the core purposes of an ILIT, explains when it is commonly used, and highlights how careful drafting and administration can help reduce estate tax exposure while making distributions smoother for beneficiaries when a policy proceeds become payable.
Choosing to place a life insurance policy into an irrevocable trust involves a range of considerations from selecting beneficiaries to naming the trustee and planning premium funding. We work with clients to assess insurance ownership and beneficiary designations, coordinate with agents and carriers, and prepare the trust documentation and ancillary instruments such as assignments, certification of trust, and pour-over wills when appropriate. Our approach emphasizes clear communication, attention to timing rules related to three-year lookback provisions, and practical administration strategies to ensure the trust operates as intended after the policyholder’s passing.
An ILIT can deliver several important advantages when integrated into an estate plan: it can remove life insurance proceeds from a taxable estate, provide liquidity to pay estate expenses, protect benefits for beneficiaries who need controlled distributions, and offer a vehicle for directing life insurance proceeds to trusts for minors or individuals with special needs. Establishing an ILIT requires careful attention to ownership transfer rules, premium funding methods, and the selection of a responsible trustee. Properly implemented, an ILIT can reduce administrative uncertainty for survivors and create a predictable path for how insurance benefits are handled after death.
The Law Offices of Robert P. Bergman provides estate planning services for clients throughout California, including those in Pismo Beach and San Jose. Our practice assists with a full range of estate planning documents such as revocable living trusts, last wills and testaments, powers of attorney, advance health care directives, and various trust forms including irrevocable life insurance trusts and special needs trusts. We emphasize pragmatic drafting and careful client counseling to produce documents that reflect client priorities and that work efficiently with financial institutions, insurance carriers, and probate courts when necessary. Our goal is to produce durable plans that reduce uncertainty for families during difficult times.
An irrevocable life insurance trust is a trust designed to own a life insurance policy, or to receive the proceeds of a policy, outside of the insured’s estate. Because the trust is irrevocable, the grantor gives up ownership and control of the policy once it is transferred, which can remove the policy proceeds from the grantor’s estate for estate tax purposes if certain timing requirements are met. Creating an ILIT involves drafting trust provisions, transferring an existing policy or having the trust buy a new policy, and establishing mechanisms for paying premiums. Those mechanisms often involve gifts to the trust, trust bank accounts, and coordinated payment instructions to ensure carriers accept premiums.
There are important technical and administrative details to address when establishing an ILIT. The trust agreement must be carefully written to reflect the client’s distribution wishes and to designate trustees and successor trustees. Transfers of ownership must be executed with the insurer and documented. The three-year rule requires attention: if the grantor dies within three years of transferring an existing policy into the trust, the proceeds may still be includable in the estate. Funding strategies and annual gift planning, including potential use of annual exclusion gifts, are often used to ensure premiums are available without undermining the trust’s objectives.
An ILIT is a legal arrangement in which a grantor transfers ownership of a life insurance policy to a trust that cannot be revoked or altered by the grantor. Once the policy is owned by the trust, the insurer pays the proceeds to the trust upon the insured’s death, and the trustee then distributes those proceeds according to the trust terms. This structure often keeps insurance proceeds out of the grantor’s taxable estate and can provide liquidity to pay debts, taxes, or other obligations without forcing asset sales. Clear trust instructions govern who benefits, when distributions occur, and how the trustee should manage the funds for beneficiaries’ needs.
Setting up an ILIT typically involves drafting a trust instrument that names the grantor, trustee, and beneficiaries; arranging ownership or purchase of a life insurance policy by the trust; and coordinating premium funding. Additional tasks include completing any required assignment of the policy to the trust and obtaining a certification of trust for use with financial institutions and insurers. The trustee must keep accurate records, manage trust accounts, and follow distribution instructions. Ongoing review is advisable to ensure that changes in family circumstances, tax law, or insurance needs are reflected in the overall estate plan.
Understanding the terminology used in trust planning helps clients make informed decisions. Important terms include grantor, trustee, beneficiary, trust corpus, assignment, estate inclusion rules, and funding mechanisms like annual exclusion gifts. These terms govern how a trust is created, how it operates, and how insurance proceeds are handled. Clear definitions reduce miscommunication and help trustees fulfill their duties. This glossary section explains the most commonly referenced words and concepts so that clients and family members can navigate the ILIT process with greater confidence and clarity.
A trust is a legal arrangement in which a person or entity called a trustee holds legal title to assets for the benefit of one or more beneficiaries according to instructions set out in a trust instrument. The document specifies powers, duties, and distribution rules, and may be revocable or irrevocable depending on the grantor’s intent. Trusts are used to manage assets during life and after death, to provide for minors, protect assets from certain claims, facilitate tax planning, and create predictable distribution paths. Trustees have fiduciary obligations to act in beneficiaries’ best interests and to follow the trust’s written terms.
A beneficiary is an individual or entity designated to receive benefits from a trust or insurance policy when certain conditions are met. In the context of an ILIT, beneficiaries receive the policy proceeds as directed by the trust terms, often for purposes such as paying estate expenses, supporting family members, or funding long-term needs. Beneficiaries may receive distributions outright or may receive payments according to a schedule or conditions set by the grantor. Proper beneficiary designations in trust documents and on insurance forms help avoid unintended outcomes and ensure proceeds are used as intended.
The grantor, sometimes called the settlor, is the person who creates the trust and transfers assets into it. For an ILIT, the grantor is typically the insured who transfers ownership of a life insurance policy into the trust or who arranges for the trust to purchase a policy. Because an ILIT is irrevocable, the grantor gives up certain ownership rights and control over the policy, and the trust document governs how proceeds will be managed and distributed. The grantor often provides instructions about beneficiaries, trustee powers, and funding arrangements to ensure the trust achieves its intended objectives.
A trustee is the person or entity appointed to manage trust assets and to carry out the trust’s directions for the benefit of beneficiaries. Trustees have a duty to follow the trust terms, to keep accurate records, and to act prudently in administering trust funds. For an ILIT, the trustee handles the receipt of insurance proceeds, coordinates investments or distributions, pays any authorized expenses, and communicates with beneficiaries. Choosing a trustee with sound judgment and reliability is important because the trustee’s decisions will shape how benefits are preserved and distributed over time.
When evaluating options for life insurance and estate planning, it is useful to compare ILITs with alternatives such as keeping a policy in the personal estate, beneficiary designations, or using revocable trusts. Each approach has trade-offs regarding control, tax treatment, flexibility, and administrative complexity. An ILIT can offer greater protection against estate inclusion but reduces the grantor’s control. Maintaining personal ownership may be simpler but can leave proceeds subject to estate taxes or probate delays. A thoughtful comparison helps clients choose the arrangement that best aligns with family goals, liquidity needs, and risk tolerance.
If a life insurance policy’s death benefit is relatively modest and is unlikely to significantly affect estate tax calculations, keeping the policy owned personally rather than transferring it to a trust may be an acceptable approach. Personal ownership may offer greater flexibility for policy changes and beneficiary updates without trust administration. For some families, the convenience of direct ownership, combined with simple beneficiary designations and coordinated planning documents like a pour-over will or revocable trust, can provide adequate protection and liquidity without the complexity of an irrevocable structure.
Maintaining ownership of a life insurance policy outside of a trust can be preferable when the policyholder wants to retain the ability to change coverage, borrow against cash values, or adjust beneficiaries without trust formalities. This approach suits individuals who prioritize direct control and anticipate making frequent modifications to coverage terms. It also avoids creating a trust administration burden for successors. However, those who choose personal ownership should still coordinate beneficiary designations and estate planning documents to ensure proceeds pass as intended and to minimize administrative complications after death.
For individuals with substantial estates or significant life insurance holdings, an ILIT can be a key component of a comprehensive plan to manage potential estate tax exposure and to ensure liquidity for settling affairs. Careful drafting and timely transfers are essential to achieve the tax benefits often sought with an ILIT. In these circumstances, combining the ILIT with other planning tools such as revocable living trusts, financial powers of attorney, and advanced directives provides a cohesive structure that addresses both asset management during life and orderly distribution after death.
When families have blended relationships, beneficiaries with special needs, minor heirs, or concerns about creditor claims, an ILIT helps create controlled distribution mechanisms governed by clear trust terms. Pairing an ILIT with provisions like special needs trusts, guardianship nominations, and pour-over wills can protect both benefits and family harmony. Drafting these arrangements together ensures that insurance proceeds are directed exactly as intended, prevents accidental disinheritance, and provides for a stable, managed income stream or lump-sum distribution depending on the trust’s objectives.
A comprehensive approach that includes an ILIT alongside other estate planning documents can bring clarity and coordination to how assets will be managed and distributed. It can ensure that life insurance proceeds provide liquidity for taxes and expenses, that minor or vulnerable beneficiaries are protected, and that family wishes are honored. Coordinating the ILIT with powers of attorney, advance health care directives, and revocable trusts reduces gaps in planning and avoids conflicting instructions. Regular reviews of the entire plan help adapt to changes in family circumstances, financial situations, or law.
When an ILIT is part of a broader planning strategy, trustees and family members benefit from clearer guidance and consolidated documentation. The trust instrument can specify payout timing, spending guidelines, and successor trustee procedures so that the proceeds are used in alignment with the grantor’s goals. This cohesion reduces the risk of disputes, simplifies administrative tasks for successors, and can lead to fairer outcomes for beneficiaries. Thoughtful planning also provides peace of mind knowing there is a coordinated plan for both immediate and long-term needs.
An ILIT can help remove life insurance proceeds from a grantor’s taxable estate, potentially reducing estate tax exposure while providing liquid funds to pay estate administration costs, debts, and taxes. This planning tool is especially relevant when other assets are illiquid, such as family businesses or real estate, and beneficiaries would otherwise need to sell assets to meet obligations. With proper timing and documentation, the trust receives proceeds directly at death, enabling the trustee to manage distributions and liquidity needs in a manner consistent with the grantor’s goals.
Through an ILIT, the grantor can direct how and when beneficiaries receive proceeds, protecting funds from premature depletion, creditor claims, or unintended use. Trust terms can establish staggered distributions, support for education or health needs, or ongoing financial oversight. This control is particularly valuable for beneficiaries who are minors, have special needs, or may not be prepared to manage a large sum. A carefully drafted trust provides a framework for the trustee to follow, ensuring that assets are managed responsibly and according to the grantor’s intentions.
When transferring an existing life insurance policy to an irrevocable trust, timing matters because of rules that can cause the policy proceeds to remain part of the grantor’s estate if death occurs within a specified period after transfer. It is important to plan transfers well in advance and to understand how gifts to the trust will be structured to fund premiums. Good planning includes coordinating with your insurance carrier and ensuring that all assignments and ownership changes are properly documented. Communicating the plan to trustees and beneficiaries also reduces potential misunderstandings.
The trustee plays a central role in an ILIT by managing premiums, receiving proceeds, and making distributions per the trust terms. Selecting a trustee who is organized, trustworthy, and able to communicate effectively with beneficiaries and service providers reduces the administrative burden and helps ensure a smooth transition when benefits are paid. Consider naming successor trustees and providing guidance on recordkeeping, investment parameters, and distribution criteria so that the trustee can fulfill obligations while honoring the grantor’s wishes.
Clients often consider an ILIT when they want to ensure that life insurance proceeds are available for estate liquidity, to minimize estate inclusion, or to provide structured distributions for beneficiaries. An ILIT can address concerns about probate delays and asset sales by creating a direct pathway for funds to be managed and used immediately after death. For families with complex needs, including special requirements for minors or disabled beneficiaries, an ILIT can be paired with other trust structures to deliver tailored support while preserving key benefits for the intended recipients.
Other common reasons to establish an ILIT include protecting proceeds from creditor claims, avoiding unintended beneficiary changes through beneficiary designation conflicts, and creating a clear plan for how funds should be used for specific purposes such as education, long-term care, or family business succession. Integrating the ILIT with a broader plan that includes documents like powers of attorney and advance health care directives ensures that your financial and health decisions are coordinated and that your family has a roadmap to follow in the event of incapacity or death.
An ILIT is commonly considered when there is a significant life insurance policy, when estate liquidity is needed to cover taxes or debts, when beneficiaries include minors or individuals with special needs, or when the owner wants to provide directed management of proceeds. It is also used when there are blended family concerns and the grantor desires to ensure certain heirs or relatives receive specified benefits. These circumstances often benefit from a structured trust approach that clarifies distributions and reduces potential family disputes over insurance proceeds.
When an individual owns significant life insurance policies, the proceeds can substantially increase the size of an estate, potentially triggering estate tax considerations and complicating the settlement process. Placing a policy in an irrevocable trust can remove the proceeds from the taxable estate if timed and documented correctly. This arrangement offers a straightforward way to preserve the intended beneficiaries’ financial security and to provide liquidity for estate administration without forcing the sale of other assets.
If beneficiaries include minors, adults who lack financial capacity, or individuals with special needs, an ILIT helps create managed distributions that protect long-term interests. Trust terms can specify age-based distributions, ongoing support criteria, or integration with a special needs trust to preserve eligibility for public benefits. These carefully drafted provisions prevent outright lump-sum payments that could be misused and provide trustees with clear authority to act in beneficiaries’ best interests while following the grantor’s precise instructions.
For owners of closely held businesses or illiquid assets, life insurance proceeds can provide essential liquidity to satisfy estate taxes, outstanding debts, or business succession requirements. An ILIT ensures those proceeds are separated from personal assets and managed in a manner intended to support business continuity or equitable family distributions. Properly integrated planning helps avoid forced sales or disruptive financial decisions during a difficult period, preserving the long-term viability of family businesses and other concentrated holdings.
Although the Law Offices of Robert P. Bergman is based in San Jose, we assist clients throughout California, including Pismo Beach and San Luis Obispo County, with estate planning matters such as irrevocable life insurance trusts. We offer remote and in-person consultations to review insurance policies, draft trust instruments, coordinate assignments, and explain funding options. Our goal is to provide clear guidance so clients in the Central Coast area can make informed decisions and implement trust arrangements that meet family objectives and administrative needs at an approachable pace.
Clients select our firm for careful drafting and clear communication throughout the trust planning process. We emphasize practical documentation that integrates with existing estate planning instruments such as revocable living trusts, pour-over wills, powers of attorney, and advance health care directives. Our approach includes explaining the implications of transfers and the steps necessary to fund a trust and to coordinate with insurers, ensuring that clients and trustees understand their options and responsibilities once the trust is in place.
We focus on creating practical plans tailored to each family’s needs and mindful of timing, tax considerations, and administrative logistics. From preparing assignment forms and certification of trust documents to advising on premium funding and trustee selection, we provide step-by-step assistance to help clients implement an ILIT effectively. We also coordinate with financial advisors and insurance carriers to confirm that ownership and beneficiary changes are carried out according to the client’s directions.
Our team strives to make the process straightforward for clients by explaining technical concepts in plain language and by preparing clear trust documents and ancillary instruments that trustees and beneficiaries can rely on. We encourage regular plan reviews to account for life changes such as marriage, divorce, births, or changes in asset composition, and we assist with trust administration and any required trust modifications so the arrangement continues to reflect client priorities over time.
Our process begins with a detailed consultation to understand client goals, family dynamics, insurance policies, and financial objectives. We then recommend the appropriate trust structure, draft the trust instrument, and prepare any related documents such as assignment forms, certification of trust, and pour-over wills. We coordinate ownership transfers with insurance carriers and advise on premium funding strategies. Finally, we provide trustees and beneficiaries with clear guidance on administration, recordkeeping, and distribution procedures so the trust operates smoothly after policy proceeds are paid.
The first step is a comprehensive meeting to review existing estate planning documents, life insurance policies, and family circumstances. During this review we identify whether a new ILIT should be created or an existing policy should be reassigned to a trust, and we explain the tax and timing considerations involved. We also discuss beneficiary objectives, trustee selection, and coordination with other estate planning instruments, ensuring that all relevant information is gathered before drafting begins so the trust accurately reflects the client’s intentions.
Collecting up-to-date policy statements, beneficiary designations, and premium schedules is essential to determine whether a policy transfer is feasible and how to structure funding. We also review assets that might affect estate tax exposure, such as retirement accounts, real estate, and business interests. This information allows us to recommend practical steps for funding the trust and ensuring premiums are paid on time, and to identify any administrative hurdles that must be addressed with insurers or financial institutions.
During the initial meeting we discuss the client’s goals for distributions, whether beneficiaries include minors or individuals with special needs, and any timing preferences for payouts. This conversation informs trust provisions such as payout schedules, discretionary distributions for health or education, and successor trustee rules. Understanding these objectives early enables us to craft a trust that balances protection with flexibility, and to explain how the ILIT will interact with other estate planning tools to achieve the desired results.
After gathering information and confirming objectives, we prepare a trust instrument tailored to the client’s wishes and consistent with current law. We also draft any necessary ancillary forms, such as assignment agreements, certifications of trust, and letters of instruction for trustees. We review the draft with the client, make revisions as needed, and coordinate execution and notarization. We ensure that insurers and financial institutions receive the documentation they require to recognize the trust as the policy owner or beneficiary.
We work with insurance carriers and financial institutions to implement ownership changes and beneficiary updates, ensuring the transfer is recorded accurately. This coordination includes completing assignment forms, providing a certification of trust when requested, and verifying that premium payment methods are acceptable to the carrier. Clear communication with these third parties prevents administrative errors and helps confirm that the trust holds the necessary rights to receive policy proceeds when they become payable.
Funding an ILIT often requires annual gifts to the trust to cover premium payments or establishing a trust bank account for premium remittance. During execution we document funding instructions, outline procedures for making gifts, and advise on how to handle premium payments in a manner that supports the trust’s objectives. We explain the implications of different funding strategies and provide templates for annual gift letters or other records to ensure the trustee can demonstrate the source and purpose of funds used to maintain the policy.
Once the ILIT is in effect, the trustee will manage premiums, maintain records, and, upon the insured’s death, receive and distribute proceeds according to the trust terms. We provide guidance for trustees on recordkeeping, tax reporting, and distribution decisions, and we remain available to assist with trust administration tasks. Periodic reviews of the trust and related estate planning documents are advisable to confirm that the arrangement continues to reflect family needs and changes in law or financial circumstances.
Good administrative practices include maintaining clear records of premium gifts, bank statements, insurer correspondence, and trustee decisions. We advise trustees on how to document transactions and how to communicate with beneficiaries about trust purpose and payout expectations. Transparent recordkeeping reduces the risk of disputes and ensures an orderly process when the time comes to receive insurance proceeds. Trustees should also be informed of any reporting obligations and the importance of following the trust’s distribution guidelines.
Because family situations and financial circumstances change, periodic review of the ILIT and related estate planning documents is important. While an ILIT is irrevocable, other parts of a comprehensive plan such as revocable trusts, wills, or powers of attorney may be updated to reflect new priorities. We recommend periodic check-ins to ensure beneficiary designations on unrelated assets, premium funding arrangements, and trustee appointments still align with the overall plan so that beneficiaries receive the intended protection and distribution outcomes.
An irrevocable life insurance trust is a trust created to own a life insurance policy or to receive the proceeds of a policy so that the proceeds are held and managed outside of the insured’s taxable estate. The trust is irrevocable, meaning the grantor gives up ownership rights over the policy once it is transferred, and the trustee administers the proceeds according to the trust terms. The arrangement can provide liquidity for estate obligations and structured distributions for beneficiaries. Because the trust holds ownership, the insurer pays proceeds directly to the trustee upon the insured’s death. Legal and administrative steps include drafting the trust agreement, coordinating ownership changes with the insurer, and establishing funding methods for premiums to keep coverage in force.
Transferring a policy to an ILIT changes who has legal ownership and control; the grantor generally gives up the ability to alter the policy or name different beneficiaries without trustee involvement. This loss of control is intentional to achieve certain planning goals such as removing proceeds from the taxable estate. While the grantor may no longer directly manage the policy, the trust can be drafted with provisions that outline permissible trustee actions and successor trustee arrangements. It is important to weigh the benefits of reduced estate inclusion against the decreased personal control and to document premium funding plans so the policy remains effective within the trust structure.
Premiums for a policy owned by an ILIT are commonly funded through gifts from the grantor to the trust, often structured as annual exclusion gifts to cover each year’s premium. The trustee may hold those gifts in a trust account and use them to remit payments to the insurer. Other approaches include funding the trust with a bank account or investment asset that generates income to pay premiums. Proper documentation of gifts and payments is important to demonstrate the source and purpose of funds and to maintain the integrity of the trust’s administration. Coordination with the insurer ensures that their payment procedures align with the funding approach chosen.
The three-year rule refers to a lookback period during which a transfer of an existing policy into an ILIT may still cause the proceeds to be included in the transferor’s taxable estate if the insured dies within three years of the transfer. This rule is intended to prevent last-minute transfers designed solely to avoid estate inclusion, so timing transfers in advance of any foreseeable risk is important. Planning around the three-year period may include purchasing a new policy owned by the trust or arranging other strategies that prevent estate inclusion. Legal counsel can explain how the rule applies to your particular situation and recommend best practices for timing and documentation.
Yes, a trust can be named as either the owner or the beneficiary of a life insurance policy, and in many ILIT arrangements the trust is the owner and beneficiary. When the trust owns the policy, the insurer issues the contract in the trust’s name and the trustee manages premium payments and policy decisions within the powers granted by the trust. Naming the trust as beneficiary ensures proceeds are paid into the trust for management and distribution under the trust terms. Careful drafting is necessary to ensure insurer paperwork and trust documents are consistent and to avoid unintended conflicts between beneficiary designations and other estate plan elements.
An ILIT should be coordinated with other estate planning documents to ensure a cohesive plan. A revocable living trust, pour-over will, powers of attorney, and advance health care directives all serve different roles but should work together with the ILIT to reflect the grantor’s overall objectives. For example, a pour-over will may direct any remaining assets to a revocable trust, while the ILIT governs insurance proceeds separately. Regular reviews ensure that beneficiary designations on accounts and policies align with trust provisions and that all documents remain consistent as circumstances change.
A trustee should be someone reliable and organized who can manage financial matters, communicate with beneficiaries, and follow the trust’s instructions. The trustee’s duties include maintaining records, paying premiums, filing any required reports, and administering distributions when proceeds are received. Individuals sometimes choose a trusted family member, a professional fiduciary, or a corporate trustee depending on the family’s needs and the complexity of the trust. Naming successor trustees and providing clear guidance in the trust document helps maintain continuity and reduces the likelihood of administrative difficulties after the grantor’s death.
Whether proceeds are protected from beneficiaries’ creditors depends on the trust terms and applicable law. An ILIT can include spendthrift provisions and distribution restrictions that limit an individual beneficiary’s ability to assign or have their trust interest reached by creditors. These provisions provide a level of protection, though specific outcomes vary by jurisdiction and by the nature of the creditor claim. Drafting appropriate protective language and coordinating with state law principles helps maximize the potential for creditor protection while maintaining flexibility to meet beneficiaries’ needs.
If premium payments lapse after a policy is transferred to an ILIT and the policy lapses or is surrendered, the trust will no longer have coverage and the intended proceeds may not be available when expected. To prevent this outcome, funding arrangements and clear instructions for premium payment should be established when the trust is created. Trustees should maintain communication with insurers, monitor premium schedules, and document payments. If a lapse occurs, options may include reinstatement if allowed by the insurer or exploring replacement coverage if appropriate, though reinstatement can be subject to underwriting and age-related limitations.
Regular review of an ILIT and the wider estate plan is recommended when there are significant life events such as marriage, divorce, births, deaths, changes in health, or major shifts in financial circumstances. While an ILIT is irrevocable and cannot be altered by the grantor after execution in most cases, related documents and funding arrangements should be reviewed to ensure they remain aligned with objectives. Periodic checks also help confirm that premium funding continues uninterrupted and that trustee appointments and beneficiary designations remain appropriate.
Criminal Defense
Homicide Defense
Manslaughter
Assault and Battery
Assault with a Deadly Weapon
Battery Causing Great Bodily Injury
Domestic Violence
Domestic Violence Protection Orders
Domestic Violence Restraining Order
Arson Defense
Weapons Charges
Illegal Firearm Possessions
Civil Harassment
Civil Harassment Restraining Orders
School Violence Restraining Orders
Violent Crimes Defense
Estate Planning Practice Areas