Boland Law Group, PLLCPassionately Preserving Wealth™
Irrevocable life insurance trusts
Irrevocable life insurance trust attorneys in Scottsdale
A life insurance policy you own on your own life is counted in your estate for federal estate tax. An irrevocable life insurance trust, or ILIT, owns the policy instead, so the death benefit reaches your family outside the estate, on terms you set, with cash on hand when the estate tax is due. Boland Law Group designs ILITs for Arizona families in Scottsdale, Paradise Valley and across the state, administers the annual Crummey notices, and publishes its fees.
What an irrevocable life insurance trust does
Life insurance proceeds are usually free of income tax. They are not free of estate tax. Under section 2042 of the Internal Revenue Code, the death benefit is part of your gross estate if you held any incidents of ownership in the policy: the right to change the beneficiary, borrow against it, surrender it or assign it. Naming your revocable living trust as owner does not help, because you control that trust.
An ILIT is a separate trust that you cannot revoke, with an independent trustee who applies for, owns and pays for the policy. Because you hold no incidents of ownership, the proceeds are paid to the trust outside your estate and outside your spouse's. The trustee then holds them on the terms you wrote: for a surviving spouse, for children at the ages you choose, in continuing trusts that protect each share from a beneficiary's creditors and divorce, or for grandchildren.
The trust also solves a timing problem. Federal estate tax is due nine months after death, and wealthy estates are often rich in real estate and private companies but short of cash. The trustee may lend to the estate or buy assets from it, so the family is not forced to sell a business or a Paradise Valley home on a deadline.
| Question | Owned by you | Owned by an ILIT |
|---|---|---|
| Counted in your estate? | Yes, the full death benefit | No, if the trust bought the policy, or once three years have passed since you gave it |
| Who decides who receives it? | The beneficiary form, which can be changed | The trust terms, which you cannot change |
| Protected once paid? | Paid outright, exposed to creditors and divorce | Held in trust for each beneficiary |
| Cash for the estate tax? | Yes, but the policy adds to the tax it pays | Trustee can lend to or buy from the estate |
| Can you borrow against it? | Yes | No, the trade for the exclusion |
Who needs an ILIT in Arizona
The tax case begins where your estate, with the policy counted, approaches the federal exemption: $15,000,000 for one person and $30,000,000 for a married couple in 2026. Many families miss it because they think of insurance as separate from the estate. It is not. A couple with $22 million of other assets and a $10 million policy they own has a $32 million estate.
Below the line, an ILIT is a control instrument rather than a tax instrument. It decides when and how proceeds are paid, keeps them away from a beneficiary's creditors and former spouses, and can hold them for a minor, or, when drafted for it, for a beneficiary with special needs without disturbing public benefits.
Our clients come to the Scottsdale Airpark office from Paradise Valley, North Scottsdale, Carefree and across the Valley. The families who most often need this page are below.
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Couples near or above $30 million
A survivorship policy in an ILIT pays at the second death, when the estate tax is due, and adds nothing to the taxable estate.
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Owners of closely held companies
The trust provides the cash so the estate tax does not force a sale of the company, and it can fund a buy-sell arrangement.
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Blended and multi-generational families
Insurance can equalize an estate: the business or the family home to one child, an equal value to the others, with GST exemption allocated for grandchildren.
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Families below the exemption
No estate tax to save, but a large policy still needs a trustee, a timetable and protection once it pays.
How an ILIT works, from signing to the claim
Four stages, in this order. The order matters: most ILIT problems come from a policy bought before the trust existed.
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The trust is drafted
We name a trustee who is not the insured, set the distribution terms, add Crummey withdrawal powers, decide whether GST exemption will be allocated, and usually draft the trust as a grantor trust for income tax purposes.
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The trustee buys the policy
The trust obtains its own tax ID and bank account, and the trustee applies for the policy as owner and beneficiary. A policy the trust buys new is outside the three-year rule from its first day.
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You fund the premiums
Each year you give cash to the trust, the beneficiaries receive Crummey notices, and the trustee pays the carrier. Large premiums can also be carried with lifetime exemption, split-dollar or a loan, coordinated with your CPA.
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The trust collects and holds
At death the trustee files the claim, may lend to the estate or buy its assets for cash where the trust permits it, never requires it, and holds the rest for the family on the trust's terms. Trust administration picks up from here.
The annual Crummey cycle
A gift to a trust is normally a future interest, which the $19,000 annual exclusion does not cover. A Crummey power turns it into a present interest by giving each beneficiary a short right to withdraw. The rule comes from Crummey v. Commissioner, a 1968 decision of the Ninth Circuit, the federal appeals court for Arizona. No statute prescribes the notice, but the IRS looks for proof that each beneficiary knew of the right, so the cycle below should happen every year.
You give the premium to the trust
Cash goes into the trust's own account, not to the insurance company, so there is a clear gift for the notice to describe.
The trustee sends written notice
Each beneficiary is told the amount and their right to withdraw a share of it. A minor's notice goes to a parent or guardian.
The withdrawal window runs
Commonly 30 days. No one is expected to withdraw, and no one may be asked to promise not to.
The right lapses
We draft the trust so only the safe amount lapses each year, the greater of $5,000 or 5 per cent of the trust under section 2514(e). The rest carries forward as a hanging power, so the lapse is not treated as a gift by the beneficiary.
The trustee pays the premium
From the trust account, on the carrier's schedule, with a copy of every notice kept in the file for an examiner who may ask decades later.
A married couple can give $38,000 per beneficiary. In Arizona, a gift of community property is treated as made half by each spouse, so premiums paid from community funds reach that figure without a separate gift-splitting election. Our annual Crummey administration runs this cycle for you.
How ILITs fail, and what prevents it
An ILIT is simple on paper and unforgiving in practice. These are the mistakes that put the death benefit back in the estate, or turn part of it into taxable income, and the step that prevents each one.
Giving away a policy you already own
If you die within three years of the transfer, section 2035 includes the full death benefit. Where that window is a real concern, the trust can buy the policy for its full value instead: section 2035(d) excepts a bona fide sale for full consideration, and a grantor trust keeps the sale clear of the transfer-for-value rule.
The transfer-for-value trap
A sale, or a gift of a policy whose loan exceeds its basis, can make part of the proceeds taxable income under section 101(a)(2). Drafting the ILIT as a grantor trust treated as wholly owned by the insured brings the transfer within an exception, under Rev. Rul. 2007-13.
The insured as trustee
A trustee holds incidents of ownership. An insured who created the trust and serves as trustee, even as co-trustee, can put the policy back in the estate. For a survivorship policy, neither spouse should serve.
Missed notices and direct payments
Premiums paid straight to the carrier make the gift harder to document and the withdrawal right harder to defend, and a year without notices gives the IRS its argument that no beneficiary knew of a right to withdraw. Either can cost the annual exclusion. Skipped notices are how ILITs fail on audit.
Community funds and a beneficiary spouse
If one spouse is a beneficiary and premiums come from community property, that spouse is also a grantor, which risks inclusion in their estate. A partition agreement and separate-property funding come first.
GST exemption left to chance
A trust meant for grandchildren needs GST exemption allocated deliberately on a Form 709, not left to the automatic rules. We send your CPA a reporting memorandum for every year gifts are made.
A policy nobody reviews
Universal life policies can lapse when credited rates fall. The trust should direct who reviews the in-force illustration, and how often, with your insurance advisor.
A trust that cannot change
Divorce, a beneficiary in trouble or new law can make old terms wrong. A trust protector and Arizona's decanting statute keep the one-way door serviceable.
A Paradise Valley couple, with and without an ILIT
A married couple in Paradise Valley own a home, a portfolio and a share of a family company worth $26 million together. They also hold a $10 million survivorship policy in their own names.
Because a policy they own counts at its full death benefit, their estate at the second death is $36 million. After the combined $30 million exemption, with the first spouse's unused exemption carried over by a timely Form 706, $6 million is taxed at 40 per cent.
Had an ILIT bought the policy from the start, the estate would be $26 million, inside the exemption, and the full $10 million would reach the children in trust. The annual premium of $140,000 would be gifted to the trust inside the annual exclusion: four children at $38,000 each allows up to $152,000 a year.
Because this couple's policy already exists, their real plan would weigh a sale to the trust against a gift and the three-year rule. See how the 2025 law set the exemption for the background.
| At the second death | Owned by the couple | Owned by an ILIT |
|---|---|---|
| Home, portfolio and company | $26,000,000 | $26,000,000 |
| Survivorship death benefit counted | $10,000,000 | $0 |
| Gross estate | $36,000,000 | $26,000,000 |
| Combined exemption, 2026 | $30,000,000 | $30,000,000 |
| Taxable estate | $6,000,000 | $0 |
| Federal estate tax at 40 per cent | $2,400,000 | $0 |
| Reaches the family | $33,600,000 | $36,000,000 |
Federal estate tax kept by the family in this example, from one change: who owns the policy. With growth in the rest of the estate, the difference widens.
Arizona law and your ILIT
The tax rules are federal. The trust is governed by Arizona law, and four features of it shape how we draft.
No state estate or inheritance tax
Arizona adds nothing to the federal 40 per cent, so the ILIT's work is entirely federal. Trust income is taxed at Arizona's flat 2.5 per cent, and a grantor ILIT reports on your return.
Community property
A policy bought with community funds belongs half to each spouse, which changes what each estate includes, and premiums from community funds are gifts by both spouses. Who owns what, and which money pays, is settled before the trust is signed.
A trust that can last 500 years
Arizona lets a trust interest remain unvested for up to 500 years, so an ILIT with GST exemption allocated can hold the proceeds for grandchildren and beyond as a dynasty trust.
A.R.S. § 14-2901
Decanting and settlement agreements
A trustee with discretion can move an older ILIT into a new trust with better terms without going to court, and interested persons can settle many administrative questions by agreement.
A.R.S. §§ 14-10819, 14-10111
What an ILIT costs, published
We publish our fees. An ILIT is priced on the firm's Advanced Planning and Lifetime Wealth Transfer schedule, which you can read before you call.
Each figure is a minimum, fixed in a written engagement letter before work begins. It includes design, drafting, execution and the first $7.5 million funded; each additional $1 million adds the stated figure. A shorter runway than the standard 90 days takes a published timing loading, and any third-party costs pass through at cost. The published worked example: an ILIT for a single life, funded at $20 million, is $17,500 and up.
Most ILITs sit beside a revocable trust plan, priced on the core schedule and explained in our 2026 Arizona estate planning cost guide.
| Service | 2026 minimum | Each added $1M |
|---|---|---|
| New ILIT | ||
| ILIT, single life | $7,500+ | $750 |
| ILIT, survivorship (second-to-die) | $10,000+ | $750 |
| Every year | ||
| Crummey administration, up to four powerholders | $1,500 / yr | |
| Each additional powerholder | $150 / yr | |
| An ILIT you already have | ||
| Decanting into a new trust | $10,000+ | $1,000 |
| Nonjudicial settlement or modification | $5,000+ | $500 |
Minimums from the published 2026 schedule, before timing and asset loadings. Lines with a per-million figure include the first $7.5 million. Decanting is priced as scoped on the schedule. Where this table and the schedule differ, the schedule controls. The policy itself is placed by your insurance advisor.
Ten questions about irrevocable life insurance trusts
What is an irrevocable life insurance trust (ILIT)?
An ILIT is a trust you cannot revoke that owns a life insurance policy on your life. Because you hold no incidents of ownership, the death benefit is paid to the trust outside your estate, and the trustee holds it for your family on the terms you set, including cash to pay any estate tax.
Do I need an ILIT if my estate is under the $15 million exemption?
Often not for tax reasons, but count the policy first: a death benefit you own is part of your gross estate. A couple with $20 million of other assets and a $12 million policy they own has a $32 million estate, above the $30 million combined exemption. Families below the line also use ILITs to control and protect how proceeds are paid.
Can I be the trustee of my own ILIT?
No. A trustee holds incidents of ownership, so an insured who created the trust and serves as trustee can put the policy back in the estate under section 2042. An adult child, a trusted friend or a professional trustee can serve. For a single-life policy your spouse often can, within limits; for a survivorship policy, neither spouse should.
What are Crummey notices, and are they really required?
A Crummey notice tells each beneficiary that a gift has reached the trust and that they may withdraw their share for a stated window, commonly 30 days. The withdrawal right is what qualifies the premium gift for the $19,000 annual exclusion. No statute requires the notice itself, but the IRS takes the position that a right the beneficiary never knew about does not create a present interest, so the notices are your proof.
Can I move a policy I already own into an ILIT?
Yes, after two screens. If you die within three years of a gift of the policy, section 2035 pulls the death benefit back into your estate. And a sale, or a gift of a policy whose loan exceeds its basis, can trigger the transfer-for-value rule. A trust treated as wholly owned by the insured for income tax purposes, sometimes combined with a sale to the trust for full value, addresses both.
Should the ILIT own a survivorship (second-to-die) policy?
For many married couples, yes. The marital deduction usually defers estate tax to the second death, and a survivorship policy pays at exactly that moment, generally for a lower premium than two single-life policies. A single-life policy fits when the need comes at the first death, such as a buy-sell obligation or a blended family.
Can my spouse be a beneficiary of the ILIT?
Yes, for a single-life policy on the other spouse, with care in Arizona. Premiums paid from community funds are gifts from both spouses, which would make the beneficiary spouse a grantor of their own trust and risk inclusion in that spouse's estate. We fund those premiums from the insured spouse's separate property, usually after a partition agreement.
Can an ILIT be changed after it is signed?
Not revoked, but it can often be improved. Arizona's decanting statute, A.R.S. § 14-10819, lets a trustee with discretion move the trust into a new one with better terms without court approval, and nonjudicial settlement agreements under § 14-10111 resolve many administrative questions by consent. A trust protector adds another route.
How much does an ILIT cost in Arizona at Boland Law Group?
On the firm's published 2026 schedule, an ILIT for a single-life policy begins at $7,500 and a survivorship ILIT at $10,000, each including the first $7.5 million funded, plus $750 for each additional $1 million. Annual Crummey administration is $1,500 for up to four powerholders. The fee is fixed in writing before work begins.
Do you work with ILIT clients outside Scottsdale?
Yes. Clients come to our Scottsdale Airpark office from Paradise Valley, North Scottsdale, Carefree and across the Valley. We also meet by secure video statewide and by in-home appointment in Sedona and the Prescott area. ILITs are governed by federal tax law and Arizona trust law, so the planning is the same across the state.
Bring the policy to the first meeting.
We limit our client volume deliberately, so the first conversation is unhurried. Bring the policy, or the illustration your advisor has proposed, and your existing estate documents. We will tell you whether an ILIT belongs in your plan, which kind, and what it costs, before you decide anything.
15100 N. 78th Way, Suite 203
Scottsdale, Arizona 85260
Offices and appointments
Monday to Thursday, 9am to 5pm
Saturdays by appointment
Sedona and the Prescott area
Secure video statewide
General information about federal and Arizona law as of September 2026, not legal or tax advice for any particular person, and no attorney-client relationship is formed until a written engagement letter is signed. Exemption and exclusion figures are the 2026 amounts under Rev. Proc. 2025-32. Fee figures are minimums from the firm's published 2026 schedule, before loadings. Passionately Preserving Wealth is a trademark of Boland Law Group, PLLC.