236 / What are the gift tax implications of making a gift to an ILIT in the form of premiums paid on the life insurance policy?
Gifts made to an ILIT typically come in the form of the grantor paying premiums on the life insurance policy, and must be made correctly in order to avoid creating gift tax liability. If the amount of the premiums is directly transferred to the trustee in cash, gift tax liability can arise. A grantor can make annual tax-free gifts up to annual gift tax exclusion amount ($19,000 in 2025, or $38,000 for spouses that consent to gift splitting)1 to each beneficiary of the trust.
For the premium payments to qualify for the annual gift tax exclusion amount, rather than the grantor making a gift directly to each beneficiary to pay the premiums, the funds are given to the trustee for the benefit of each beneficiary.2 The trustee then notifies each beneficiary that a gift has been received on their behalf and the trustee pays the premium on the insurance policy. To avoid gift tax liability, it also is crucial that the trustee, using what is known as a “Crummey” letter,3 notify the beneficiaries of the trust of their right to withdraw a share of the contributions within a 30-day period. After 30 days have expired, the trustee can then use the contributions to pay the insurance policy premium. The Crummey letter qualifies the transfer for the annual gift tax exclusion by making the gift a present interest gift (rather than future interest gift) thus avoiding the need in most cases to file a gift tax return.4
1. See IRS FAQ, available at https://www.irs.gov/businesses/small-businesses-self-employed/frequently-asked-questions-on-gift-taxes.
2. Let. Rul. 9809032.