What a Crummey Letter Is and Why Your ILIT Needs One Every Year
Once the ILIT is signed, you still have to pay the premiums. You do this by gifting money to the trust each year, and the trustee uses that gift to pay the insurance company. For that gift to qualify for the annual gift tax exclusion, currently $19,000 per person in 2026, the beneficiaries of the trust need a real, if temporary, right to withdraw their share of that gift. Otherwise the gift eats into your lifetime estate tax exemption instead. This right is called a Crummey withdrawal right, named after the court case that established it, Crummey v. Commissioner, 397 F.2d 82 (9th Cir. 1968).
In practice, this means every year, when you fund the trust to pay the premium, the trustee has to send each beneficiary a written notice, called a Crummey letter. It tells them they have a short window, typically 30 days, to withdraw their share of the gift. Almost no one ever exercises that right. The point is that the right exists and was properly offered. Skip this step, or do it incorrectly, and the IRS can treat your gift as a gift that doesn’t qualify for the annual exclusion, which can create exactly the estate tax exposure you built the ILIT to avoid.
This is not a one-time cost. It repeats every year, for as long as you’re funding premiums through the trust.
Who Handles the Ongoing Work After You Sign
An ILIT needs someone paying attention every year, not just on the day it’s signed. The trustee, whoever you named to run the trust, is responsible for:
- Receiving your annual gift to the trust and using it to pay the life insurance premium on time
- Sending the Crummey letters to beneficiaries every time a gift is made
- Keeping a paper trail showing the letters were sent and the withdrawal window was real
Some families use a trusted family member as trustee and handle this themselves once they understand the process. Others use a professional trustee or work with their accountant for the annual paperwork. Either way, this is ongoing work, not a one-time signing.
One thing an ILIT usually does not need is an annual tax return. An ILIT that only holds a life insurance policy typically has no taxable income while you’re alive, since a policy sitting in the trust isn’t generating income the way a rental property or investment account would. That means it often doesn’t need the same annual Form 1041 tax return that a funded asset-protection trust does. Ask your attorney or CPA to confirm this for your specific situation. It depends on what else, if anything, is inside your trust.
One more cost worth naming plainly. Once you sign an ILIT, you can’t change your mind. You can’t get the policy back, change the beneficiaries yourself, or unwind the trust if your family situation changes later. That loss of control is part of what you’re paying for. It’s the same reason the trust can keep the death benefit out of your taxable estate in the first place. If there’s a real chance you’ll want access to this policy again down the road, an ILIT may not be the right tool.
Is an ILIT Worth the Cost?
An ILIT exists to solve one problem: keeping a life insurance death benefit out of your taxable estate. Whether that problem applies to you depends on the size of your estate, including the life insurance itself.
The federal estate tax exemption is $15,000,000 under current law, and Georgia has no state estate tax or gift tax. If your total estate, including the death benefit from your life insurance policy, is well under that federal threshold, an ILIT usually isn’t necessary. Life insurance can catch people off guard here. An estate that looks comfortably under the threshold on its own can get pushed close to it once a large policy is added in, since the death benefit counts as part of your estate unless it’s inside an ILIT.
If you’re not sure whether your estate, life insurance included, is close enough to the federal threshold to matter, that’s exactly the question the strategy call answers.
