ILIT - Grantor Returns
(Individual)
If you created an irrevocable life insurance trust, the trust’s income may still show up on your personal return, and your annual contributions have gift tax implications. We handle both sides.
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You created an ILIT: here’s what that means for your tax return
You set up an irrevocable life insurance trust to keep the death benefit out of your estate. The trust owns the policy, the trust pays the premiums, and when you die, the trust, not your estate, receives the proceeds. But while you’re alive, the trust may still affect your personal tax return in two ways: if the ILIT is a grantor trust, the trust’s income shows up on your 1040; and every contribution you make to fund the premiums is a gift that may need to be reported on Form 709.
Grantor trust income on your 1040
Many ILITs are structured as grantor trusts, meaning the IRS treats the trust’s income as yours. While the policy is in force, this is usually minimal, maybe some interest on the trust’s checking account. But it still needs to go on your return. If your ILIT is not a grantor trust, the trust is its own taxpayer and files its own return; your 1040 won’t include trust income. We determine which applies and handle both returns consistently.
Gift tax and your annual contributions
Every dollar you put into the ILIT is a gift. The trust’s Crummey provisions are designed to make those gifts qualify for the annual gift tax exclusion ($19,000 per beneficiary in 2026). If you have four beneficiaries, that’s up to $76,000 per year without touching your lifetime exemption. If your contributions exceed what the Crummey powers cover, the excess needs to be reported on Form 709. We coordinate the gift tax side with your personal return.
Crummey letters: the trustee’s job, but your concern
The trustee sends Crummey withdrawal notices to each beneficiary every time you contribute. You don’t send the letters, but you should know they’re being sent and documented. If the letters aren’t there, the IRS can recharacterize your contributions as future-interest gifts, which don’t qualify for the annual exclusion. We review Crummey documentation as part of the annual filing.
The three-year rule
If you transferred an existing life insurance policy into the ILIT (as opposed to having the trust buy a new one), there’s a three-year lookback under IRC §2035. If you die within three years of the transfer, the death benefit is pulled back into your estate, undoing the tax benefit. Most ILITs avoid this by purchasing new policies, but if you did transfer one, we track where you are in that window.
What we need from you
- Your personal income documents (W-2s, 1099s, other K-1s)
- Grantor trust statement or K-1 from the ILIT (if applicable)
- Records of contributions made to the trust during the year
- Confirmation that Crummey letters were sent (the trustee should have copies)
- Prior year return for reference
Frequently Asked Questions
I created the ILIT, do I still have to report trust income on my return?
It depends on how the trust is structured. Many ILITs are set up as grantor trusts, which means any income the trust earns is reported on your personal Form 1040, even though the trust owns the assets. While the policy is in force, this is usually a small amount of interest income. If your ILIT is not a grantor trust, the trust files its own return and you don’t report its income. We’ll determine which applies and make sure both returns are consistent.
Do my contributions to the ILIT count as taxable gifts?
Yes: every contribution you make to the trust is a gift. However, if the trust includes Crummey withdrawal provisions and the trustee properly sends withdrawal notices to beneficiaries, each contribution can qualify for the annual gift tax exclusion, $19,000 per beneficiary in 2026. If your contributions exceed the total exclusion available, the excess uses your lifetime gift and estate tax exemption or, if that’s exhausted, triggers gift tax. We coordinate the gift tax reporting on Form 709.
What are Crummey letters, and do I need to worry about them?
Crummey letters are withdrawal notices the trustee sends to beneficiaries when you contribute to the trust. They give each beneficiary a temporary right to withdraw their share, usually for 30 days. The letters are what make your contributions qualify for the annual gift tax exclusion. As the grantor, you don’t send the letters, the trustee does, but you should confirm they’re being sent and documented every year, because if they’re not, your contributions may not qualify for the exclusion.
What if I transferred an existing policy into the trust?
If you transferred a life insurance policy you already owned into the ILIT, the three-year rule under IRC §2035 applies. If you die within three years of the transfer, the death benefit gets pulled back into your taxable estate, as if you still owned the policy. Most estate planners recommend having the trust purchase a new policy to avoid this entirely. If your transfer is still within the three-year window, we’ll note it in the file so everyone involved is aware.