Irrevocable Life Insurance Trust (ILIT): Top 10 Provisions

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Paul Sundin, CPA

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With respect to any life insurance policy which is or becomes a part of the trust estate, the following provisions shall apply:

Payment of premiums

The trustee in its discretion may make payments of premiums or other charges on any such policy out of the income or principal of the trust estate; however, no duty or responsibility for payment of premiums or other charges on account of any such policy shall rest upon the trustee. If sufficient funds are not available or provided to the trustee to pay the premiums or any other charge on any such policy, the trustee may exercise any option available under the insurance policy to reduce the premiums and/or insurance coverage, to use assets of the policy to pay premiums or to purchase reduced paid-up insurance, to borrow upon the policy or from any other source for the payment of the premiums, or to liquidate any of the trust assets for the payment of the premiums, whichever option, in the sole discretion of the trustee, shall be deemed to be in the best interest of the trust estate.

The trustee shall have no duty or obligation to inquire whether premium payments have been made, and in the absence of specific written notice to it that premiums have not been paid, it shall have no duty to exercise discretion to allow automatic premium loan provisions to operate, to borrow to pay premiums or to elect the automatic forfeiture feature. The trustee shall have no liability for the lapse of any policy due to the nonpayment of premiums if sufficient funds are not provided to the trustee for the payment of such premiums and shall have no duty to inform any person that the assets of the trust are not adequate to maintain the policy.

Transfers to trust

Any life insurance policy acceptable to the trustee may be transferred to the trust estate by the owner thereof by delivering the policy to the trustee and causing the trustee to be named the owner and beneficiary of the policy. Notwithstanding any provision of this Agreement to the contrary, the failure of the trustee to add a life insurance policy to Schedule A of the trust, if any, shall in no way limit the efficacy of the transfer of such policy to the trust estate. This Agreement shall apply fully to any life insurance policy into which a policy which is a part of the trust estate may be converted, reissued or consolidated.

Use of Cash Value

The trustee shall have no duty to borrow against the cash value of any policy held in the trust estate or otherwise to use the cash value for other investment purposes.

Right of Withdrawal

The trustee is authorized to discharge its distribution obligation created under Article of this Agreement by transferring or assigning to a beneficiary exercising a withdrawal right all or part of any insurance policy then held by the trustee.

Indemnification of trustee

The trustee shall not, except at its option, enter into or maintain any litigation, endorse payments of policies or take any other action with respect to any policy until it shall have been indemnified to its satisfaction against all expenses and liabilities to which it may in its judgment be involved by such action on its part. The trustee shall have no duty or responsibility to inquire into whether or not it has been designated as a beneficiary of any policy or of any employee death benefit of which it has not received notice.

Full discharge

The payment by an insurance company of the proceeds of any policy of insurance to the trustee shall be a full discharge of the insurance company on account of such policy and the insurance company shall not be responsible for the proper discharge of the trust or any part thereof.

Exculpation of insurer

No insurance company or other entity issuing any policy or policies of life insurance on the life of the grantor or any other person, which at any time are transferred to or made payable to the trustee, shall be required to ascertain whether or not any person other than the trustee initially named hereunder has become a co-trustee of the trustor trusts created hereunder, but may deal with the trustee initially named and make payments to said trustee in the amounts payable on account of such policy of insurance as if said trustee were the sole trustee hereunder.

Incidents of ownership

The trustee is vested with all right, title and interest in and to each policy of insurance held in the trust estate. The trustee is authorized and empowered to exercise all incidents of ownership with respect to any life insurance policy held in the trust estate, including the right to receive or apply dividends or distributive shares of surplus; to obtain and receive from the respective insurance companies such advances or loans on account of any policy as may be available; to exercise an option or privilege granted in the policy; to sell, assign or pledge any policy; to designate itself as beneficiary of any policy but only in its capacity as trustee of the trust to which said policy, or part thereof, is assigned or transferred; to borrow against the policy or obtain funds from others for purposes of paying policy premiums, but if there are insufficient funds to pay such premiums, the trustee shall not be accountable for failure to make such premium payment. The insurance company that has issued a policy is authorized and directed to recognize the trustee as absolute owner of that policy.

Purchase of and retention of policy

The trustee is authorized to acquire insurance policies that insure the life of either or both of the grantors, a grantor’s spouse, or any beneficiary of the trust and to apply trust assets to the payment of premiums on such policies. The trustee shall rely on the recommendation of the life insurance agent of the grantor with respect to such purchase without any duty or obligation to make further inquiry or investigation concerning the policy or the insurance company issuing the policy and shall be fully exonerated from any liability for actions taken in good faith reliance on such agent’s recommendation.

The trustee is specifically authorized to purchase insurance through and rely on the recommendations of an insurance agent or agency affiliated with the trustee. The grantor specifically acknowledges the affiliation between the trustee and Norwest Insurance, Inc. (and any other affiliated agency) and waives any conflict the trustee may have in dealing on behalf of the trust with the affiliated agency, including purchasing insurance for the trust if the grantor’s life insurance agent is an employee of Norwest Insurance, Inc., so long as such purchase is on terms and under circumstances comparable to those generally available through non-affiliated companies. The trustee further is authorized to retain any policy purchased by it or received as an original asset of the trust without any duty to diversify investments or to invest in securities or other properties during the life of the grantor.

Intent of Grantor

The grantor intends that the sole or primary asset of the trust during the grantor’s lifetime will be a policy (or policies) of life insurance of which the grantor is the insured. The grantor does not intend for the trustee to explore other investment alternatives or options.

The grantor understands that life insurance is not a typical trust investment and therefore directs the trustee to hold insurance policies in the trust consistent with this statement of intent regardless of any law or regulation on prudent investment to the contrary.

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Estate CPA

Gilbert, AZ