Wyoming ILIT (Irrevocable Life Insurance Trust) — Worked Example
Wyoming ILIT (Irrevocable Life Insurance Trust) — Worked Example
Objective: Create a multigenerational, rules-based pool of capital by having a **Wyoming-situs ILIT** own life insurance, keeping proceeds outside the insureds’ estates (if structured correctly), while allowing trustee-controlled access via policy loans/withdrawals for approved purposes.
Family & Roles
* **Grantors:** Alex (68) & Jordan (66) Harper
* **Beneficiaries:** Two adult children; four grandchildren
* **Trustee:** Corporate trustee domiciled in **Wyoming** (directed trust structure)
* **Situs/Governing Law:** **Wyoming** (privacy, directed-trust statutes, decanting flexibility)
* **Advisor team:** Estate attorney (drafts ILIT), CPA (gift/GST strategy), independent insurance advisor (policy design)
Trust Design (Key Clauses)
* **Type:** Dynasty ILIT with **GST exemption** allocated to make trust assets GST-efficient.
* **Contributions:** Annual **exclusion gifts** from the grantors (e.g., $34,000 total in 2025 assuming $17,000/beneficiary and sufficient Crummey powers).
* **Crummey Powers:** Notices issued annually; 30-day withdrawal window; trustee records evidence.
* **Distribution Standard:** HEMS (Health, Education, Maintenance, Support) for children; **purpose-limited loans** for grandchildren (education/first-home/qualified entrepreneurship).
* **Directed Trust:** Investment/insurance decisions by an **Investment/Insurance Advisor**; trustee executes.
* **Decanting/Modification:** Included, subject to Wyoming law, to modernize as statutes/products evolve.
Policy Placement
* **Owner/Beneficiary:** ILIT
* **Insured:** Youngest adult child (age 35) to maximize duration and cash-value runway
* **Product:** Conservative **Whole Life** (or low-volatility **IUL** with prudent caps/spreads)
* **Face Amount:** $1,500,000
* **Premium Funding:** $50,000/yr for 10 years (from grantors’ gifts to ILIT)
* **Design Guardrails:**
* Avoid **MEC** status (solve premiums within §7702 limits).
* Model with **conservative crediting** and **rising internal charges**.
* Maintain liquidity buffer to cover premiums/loan interest if markets underperform.
Loan/Access Policy (Inside the ILIT)
* **Eligibility:** Grandchildren may receive **trustee-approved loans** for pre-defined purposes (tuition, first-home down payment up to 20% LTV cap, seed capital with business plan).
* **Limits:** Aggregate outstanding policy loans **≤ 25% of current cash value**; minimum **interest = AFR + 1%**; amortization schedule on file.
* **Process:** Written request → advisor memo → trustee decision; annual re-underwriting of borrower’s repayment ability.
* **Safeguards:** If loan-to-value breaches 25% or interest accrues unpaid, trustee must **suspend new loans** and initiate repayment plan to protect the policy from lapse.
Tax & Reporting (High-Level)
* **Gifts:** Documented annual exclusion gifts; **Crummey notices** retained.
* **GST:** CPA allocates **GST exemption** to contributions (or at funding completion) to keep future distributions and death proceeds **GST-efficient**.
* **Income Tax:** Policy growth intended to be **tax-deferred**; death benefit **income-tax-free** under IRC §101 (subject to compliance).
* **Estate Tax:** If properly structured and administered, policy proceeds are **outside the grantors’ estates**.
Timeline Snapshot
1. **Month 0–2:** Attorney drafts ILIT (WY situs), opens ILIT bank/brokerage, selects corporate trustee and directed-trust advisors.
2. **Month 2–3:** Underwriting on insured child; **trust** applies and is owner/beneficiary; premium funding plan finalized.
3. **Years 1–10:** Annual gifts → Crummey notices → premiums paid; annual in-force review and stress tests.
4. **Years 10+**: Potential trustee-approved loans within policy limits; periodic decanting/revisions if beneficial.
5. **Claim Event (decades later):** **Income-tax-free death benefit** paid to ILIT; trustee deploys per HEMS/loan policies for descendants.
Common Pitfalls (Avoid)
* Missing **Crummey** notices/documentation
* Over-aggressive funding causing **MEC** status
* Letting loans/interest compound → **lapse risk** (taxable gain if lapsed with loans)
* Using personal ownership (pulls value into estate) instead of **trust ownership**
Important:** This is an educational example, not legal or tax advice. Trust and insurance strategies require coordination with a qualified **estate attorney** and **CPA**. Product guarantees depend on the insurer’s claims-paying ability. Policy loans/withdrawals reduce cash value and death benefit and may cause a taxable event if the policy lapses or is surrendered.
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