ILIT Trustee Duties: Roles, Responsibilities & Who to Choose

The trustee's work begins the day the trust agreement is signed. The first few weeks are when many avoidable mistakes happen.

1. Accept the trusteeship

The trustee should sign the trust agreement or a separate written acceptance. Under A.R.S. §14-10701, a person can also accept by substantially complying with the trust terms or by exercising powers as trustee. A signed acceptance removes any doubt about who is in charge.

2. Get an employer identification number

An ILIT is a separate entity for banking and tax purposes. The trustee should obtain a federal employer identification number (EIN) for the trust from the IRS. The trust's bank account and the life insurance policy should use the trust's name and EIN, never the insured's Social Security number.

3. Open a trust bank account

The trustee opens a checking account in the name of the trust, for example "Jane Smith, Trustee of the John Smith Irrevocable Life Insurance Trust dated March 1, 2026." All gifts from the insured go into this account, and all premiums are paid from this account. The account is the paper trail that proves the gifts were made to the trust and the premiums were paid by the trust, which is essential evidence if the IRS ever questions the plan. A.R.S. §14-10810 prohibits the trustee from commingling trust money with the trustee's own money.

4. Apply for and own the new policy, or accept transfer of an existing policy

The cleanest approach is for the trustee, as trustee, to apply for a new policy on the insured's life, with the trust named as both owner and beneficiary from day one. The insured signs the application as the insured and submits to the medical exam, but the trust is the applicant and owner.

Using a new policy matters because of the three-year rule in IRC §2035. If the insured transfers an existing policy he or she already owns to the ILIT and dies within three years of the transfer, the death benefit is pulled back into the insured's estate as if the transfer never happened. When the trust buys the policy originally, the three-year rule does not apply.

If an existing policy is transferred to the trust, the trustee should confirm with the insurance company in writing that the trust is now the owner and beneficiary, keep the insurer's confirmation, and understand that the estate tax benefit is not secure until three years have passed. The trustee should also be careful about any sale of an existing policy to the trust, because the transfer-for-value rule in IRC §101(a)(2) can cause part of the death benefit to become taxable income. A transfer to a trust that is treated as owned by the insured for income tax purposes generally falls within an exception to that rule, but the trustee should not buy or sell a policy without advice from the trust's attorney.

5. Review the policy and the trust agreement

Before the policy is issued, the trustee should read the trust agreement, especially the provisions about withdrawal rights, premium payments, distributions after death, and the trustee's powers. The trustee should also review the policy illustration so the trustee knows how much premium is required, when it is due, and what happens if a premium is late or reduced.

6. Create a permanent file and calendar

The trustee should keep a permanent file containing the signed trust agreement, the acceptance of trusteeship, the EIN letter, the original policy, all premium notices, bank statements, withdrawal notices and every letter to and from the insurance company. The trustee should also create a calendar with premium due dates, grace period deadlines and the dates withdrawal notices must be sent. A trusteeship can easily last 30 or 40 years, and the file may be handed to a successor trustee.

For most ILITs, the longest period of administration is the time between the purchase of the policy and the insured's death. During this period the trust usually owns nothing except the policy and enough cash to pay the next premium. The trustee's job is routine, but every task matters.

1. Receive the insured's gifts

The insured does not pay premiums directly to the insurance company. Instead, the insured gives cash to the trust by depositing a check into the trust's bank account, and the trustee uses that money to pay the premium. Paying premiums directly to the insurer complicates the gift tax analysis and weakens the record that the trust, not the insured, controls the policy. The trustee should insist that every gift go through the trust account.

2. Send Crummey withdrawal notices

Each time the insured makes a gift to the trust, the trustee must notify the beneficiaries who hold withdrawal rights that a gift has been made and that they have a limited time to withdraw their share. These notices are called Crummey notices, and they are so important they are explained in detail at the end of this section. If the trustee does not send them, the insured's gifts may not qualify for the gift tax annual exclusion.

3. Pay the premiums on time, every time

Paying premiums is the single most important ongoing duty of an ILIT trustee. If a premium is not paid by the end of the policy's grace period, the policy can lapse. A lapsed policy may be impossible to reinstate if the insured's health has declined, and a death benefit that took decades of premiums to build can disappear. The trustee should know the exact due date, the grace period, and how the insurance company sends notices. The trustee should make sure the insurer has the trustee's current mailing address and email address, because the owner, not the insured, receives premium and lapse notices.

4. Monitor the policy

Even though A.R.S. §14-10908 protects the trustee from liability for failing to evaluate the policy as an investment, a careful trustee still monitors it. This is especially important for universal life policies, whose performance depends on interest crediting rates and insurance charges. Many universal life policies purchased years ago were designed on assumptions that never materialized, and some are quietly heading toward lapse even though every scheduled premium has been paid.

A good practice is for the trustee to request an in-force illustration from the insurance company every two or three years, showing how long the policy will stay in force at the current premium. If the illustration shows the policy will lapse before the insured's life expectancy, the trustee should tell the insured and the beneficiaries and explore options with a qualified insurance advisor, such as increasing premiums, reducing the death benefit, or exchanging the policy for a new one under IRC §1035.

5. Avoid giving the insured control

The trustee must make every decision about the policy independently. The insured should not sign policy change forms, request loans, change beneficiaries or direct the trustee. If the insured exercises control, the IRS may argue the insured held incidents of ownership under IRC §2042, causing the death benefit to be included in the estate. The trustee can and should listen to the insured, but decisions must be the trustee's own.

6. Keep records and keep the beneficiaries informed

A.R.S. §14-10810 requires the trustee to keep adequate records of the administration of the trust. A.R.S. §14-10813 requires the trustee to keep the qualified beneficiaries reasonably informed and to respond to their reasonable requests for information. During the insured's lifetime, that typically means keeping copies of every notice, deposit and premium payment and being ready to show a beneficiary that the policy is in force.

7. Handle income tax reporting

Most ILITs are "grantor trusts" for income tax purposes during the insured's lifetime because IRC §677(a)(3) treats the insured as the owner of a trust whose income may be used to pay premiums on insurance on the insured's life or the insured's spouse's life. Any income the trust earns, which is usually only a small amount of interest on the bank account, is reported on the insured's own return. The trustee should ask the trust's CPA which IRS reporting method to use. Grantor trust status is an income tax concept only; it does not cause the death benefit to be included in the insured's estate.

8. Deal with a change in circumstances

Life changes over decades. The insured may stop making gifts, a beneficiary may divorce or develop a substance abuse problem, the policy may become too expensive, or the family's estate tax exposure may disappear. The trustee should talk with the trust's attorney before reacting. Depending on the trust agreement and the circumstances, options may include using the policy's cash value to pay premiums, converting to a reduced paid-up policy, exchanging the policy, nonjudicial modification, or distributing the trust's assets to a new trust under Arizona's decanting statute, A.R.S. §14-10819.

Crummey Withdrawal Notices Explained

Crummey notices are the part of ILIT administration that most often goes wrong, and they are entirely the trustee's responsibility.

Why Crummey notices exist

In 2026, a person can give up to $19,000 per recipient per year without using any of his or her lifetime gift and estate tax exemption, under the annual exclusion in IRC §2503(b). Married couples can give $38,000 per recipient. But the annual exclusion applies only to gifts of a "present interest," meaning the recipient has the immediate right to use the gift. A gift to an irrevocable trust that a beneficiary cannot touch until years later is a gift of a future interest and does not qualify.

The solution was approved in Crummey v. Commissioner, 397 F.2d 82 (9th Cir. 1968), a case from the federal circuit that includes Arizona. The trust gives each beneficiary a temporary right to withdraw his or her share of each gift. That right converts the gift into a present interest that qualifies for the annual exclusion. The beneficiaries are expected, but cannot be required, to let the right lapse so the trustee can use the money to pay the premium.

What the trustee must do

• Within a few days after each gift is deposited, send a written notice to each beneficiary who holds a withdrawal right. For a minor beneficiary, send the notice to the minor's parent or guardian.
• State the date and amount of the gift, the amount the beneficiary may withdraw, how to exercise the right, and the deadline. Most trust agreements give the beneficiary 30 days, but the trustee must follow whatever the trust agreement says.
• Keep a copy of every notice and proof of delivery. Many trustees ask each beneficiary to sign and return an acknowledgment that he or she received the notice. Email is acceptable if the trust agreement allows it and the trustee keeps a record of it.
• If possible, wait until the withdrawal period expires before paying the premium. If a premium must be paid sooner, keep enough cash in the trust to honor any withdrawal that is exercised.
• If a beneficiary actually exercises a withdrawal right, honor it. The right must be real. The IRS has attacked plans in which beneficiaries understood they would never be allowed to withdraw.

The "5 and 5" lapse limit

When a beneficiary lets a withdrawal right lapse, the beneficiary is treated as making a gift back to the trust to the extent the lapsed amount exceeds the greater of $5,000 or 5% of the trust's assets, under IRC §2514(e) and IRC §2041(b)(2). Many ILITs use "hanging" withdrawal powers or other drafting techniques to deal with this. The trustee does not need to master the technical details, but the trustee does need to follow the trust agreement exactly and keep records the CPA can use when preparing gift tax returns.

When the insured dies, the ILIT changes from a quiet trust holding a policy into a trust holding what may be the largest pool of cash the family has ever seen. The trustee's responsibilities increase dramatically.

1. File the death claim

The trustee obtains certified copies of the death certificate, locates the original policy, and files a claim with the insurance company as owner and beneficiary. The trustee should also request IRS Form 712, the life insurance statement, which the estate's CPA needs if a federal estate tax return is filed. The proceeds are generally received free of federal income tax under IRC §101(a)(1).

2. Take control of and safeguard the proceeds

Under A.R.S. §14-10809, the trustee must take reasonable steps to take control of and protect trust property. The proceeds should be deposited in an account titled in the trust's name. Large balances should be held in a way that protects them, such as a combination of insured bank deposits, Treasury securities or a money market fund, until a long-term investment plan is in place.

3. Notify and inform the beneficiaries

The trustee should promptly tell the beneficiaries that the insured has died, that the trust has received or is collecting the death benefit, and what happens next under the trust agreement. A.R.S. §14-10813 requires the trustee to keep the qualified beneficiaries reasonably informed about the trust and the material facts they need to protect their interests.

4. Provide liquidity to the estate the right way

One purpose of many ILITs is to supply cash to pay estate taxes, debts and expenses. The trustee must do this carefully. If the trust agreement requires the trustee to pay the insured's estate taxes or debts, the proceeds may be treated as receivable by the executor and included in the estate under IRC §2042(1). Well-drafted ILITs instead give the trustee permission, but not an obligation, to buy assets from the estate at fair market value or to lend money to the estate on reasonable terms. The trustee should coordinate with the personal representative and the trust's attorney before moving any money between the trust and the estate.

5. Invest the proceeds as a prudent investor

Once the trust holds cash instead of a policy, the special life insurance protection in A.R.S. §14-10908 no longer applies to that cash. The trustee must invest it under Arizona's prudent investor rule in A.R.S. §14-10902 and diversify it under §14-10903 unless the trust's purposes are better served without diversifying. A trustee who is not an experienced investor may delegate investment management to a qualified professional under A.R.S. §14-10807, but must use reasonable care in selecting and monitoring that professional.

6. Coordinate tax filings

The trustee should work with the estate's CPA on the federal estate tax return if one is required, the allocation of generation-skipping transfer tax exemption under IRC §2632 if the trust will benefit grandchildren, and the trust's own income tax returns. After the insured dies, the trust is no longer a grantor trust and must file its own Form 1041 if it has income that requires a return under IRC §6012.

What happens next depends entirely on the trust agreement. Some ILITs distribute everything outright to the children soon after the death. Others keep the money in trust for a surviving spouse for life, hold it for children until they reach certain ages, or keep it in lifetime trusts for each child to protect it from creditors and divorce.

Making distributions

The trustee must follow the distribution standard in the trust agreement. A common standard allows distributions for a beneficiary's health, education, maintenance and support. Some trust agreements give the trustee broad discretion. The trustee must apply the standard fairly and consistently, document the reasons for each discretionary decision, and treat beneficiaries impartially as required by A.R.S. §14-10803.

Protecting beneficiaries from creditors

A spendthrift clause, which most ILITs contain, generally prevents a beneficiary's creditors from reaching the beneficiary's interest before it is distributed, under A.R.S. §14-10502. A.R.S. §14-10504 also provides that a creditor cannot compel a distribution from insurance proceeds payable to a trustee to the extent Arizona law would have exempted the proceeds if they had been paid directly to the beneficiary, which ties into the life insurance exemption in A.R.S. §20-1131. The trustee protects these benefits by keeping money in the trust and paying expenses for a beneficiary directly when appropriate rather than handing over cash a creditor could seize.

Ongoing accounting, taxes and reports

The trustee must keep complete records, report to the beneficiaries, and file the trust's income tax returns. Trusts reach the highest federal income tax bracket at very low levels of income, $16,000 of taxable income in 2026, so the trustee should work with a CPA on investment and distribution decisions that affect taxes.

Trustee compensation

Under A.R.S. §14-10708, a trustee is entitled to compensation specified in the trust agreement or, if the agreement is silent, reasonable compensation. Family members often serve without pay during the insured's lifetime, when the work is light, but it is reasonable for a trustee managing millions of dollars after the death to be paid. Professional trustees charge annual fees, usually based on the value of the trust assets.

Closing the trust

When the trust agreement says the trust ends, the trustee makes final distributions, files final tax returns, provides a final accounting, and obtains receipts and releases from the beneficiaries where appropriate.

Can I be the trustee of my own irrevocable life insurance trust?

No. If you are the insured, serving as trustee can give you incidents of ownership in the policy and cause the death benefit to be included in your taxable estate under IRC §2042. Your ILIT should prohibit you from ever serving as trustee.

Can my wife or husband be the trustee?

Sometimes. A spouse can serve if the spouse's power to make distributions to himself or herself is limited to health, education, maintenance and support, the spouse did not contribute to the trust, and the policy does not insure the spouse. Because Arizona is a community property state, married couples must plan how premiums are funded so the spouse is not treated as a contributor.

What does a trustee do each year while I am alive?

The trustee receives your gifts in the trust bank account, sends Crummey withdrawal notices to the beneficiaries, waits for the withdrawal period to expire, pays the premium, keeps records, and periodically checks that the policy will stay in force.

What is a Crummey notice?

It is a written notice the trustee sends to a beneficiary after a gift is made to the trust, telling the beneficiary that he or she has a temporary right, often 30 days, to withdraw a share of the gift. The withdrawal right allows your gifts to the trust to qualify for the $19,000 per recipient annual gift tax exclusion in 2026.

What happens if the trustee forgets to send Crummey notices?

Your gifts to the trust may not qualify for the annual exclusion. That usually does not mean gift tax is owed, but it may require gift tax returns and reduce your lifetime gift and estate tax exemption.

What happens if the trustee misses a premium payment?

Most policies have a grace period, often 31 days or more. If the premium is not paid by the end of the grace period, the policy may lapse or, for some policies, begin consuming cash value. Reinstatement may require new evidence of insurability, which may be impossible if your health has changed.

Does the trustee have to diversify the trust's investments?

Not while the trust holds a policy on your life. A.R.S. §14-10908 protects an Arizona trustee from liability for failing to diversify a life insurance policy on the settlor or the settlor's spouse. After the death benefit is paid, the trustee must invest the cash under Arizona's prudent investor rule.

Can I tell the trustee what to do?

You can communicate with the trustee and share your wishes, but you cannot control the trustee's decisions about the policy. If you control the policy, the IRS may argue you held incidents of ownership, which could cause the death benefit to be taxed in your estate.

Does the ILIT have to file tax returns?

During your lifetime, the ILIT is usually a grantor trust and any small amount of income is reported on your return. After your death, the trust becomes a separate taxpayer and files Form 1041 when required. The trustee should work with a CPA.

Can the trustee use the insurance money to pay my estate taxes?

The trustee should be permitted, but not required, to buy assets from your estate or lend money to your estate. A requirement to pay your estate's taxes or debts can cause the proceeds to be included in your estate.

Is the trustee paid?

Arizona law allows a trustee to receive the compensation stated in the trust agreement or, if none is stated, reasonable compensation. Family members often serve without pay while the insured is alive. Professional trustees charge annual fees.

Can a trustee resign?

Yes. Under A.R.S. §14-10705, a trustee can resign by giving at least 30 days' notice to the qualified beneficiaries, the settlor if living, and any co-trustees, or with court approval. The trust agreement should name successor trustees so the trust is never without a trustee.

Can a trustee be removed?

Yes. The trust agreement can give a beneficiary, a trust protector or another person the power to remove and replace a trustee, and A.R.S. §14-10706 allows a court to remove a trustee for reasons such as a serious breach of trust. If you hold a removal power, the replacement should be someone who is not related or subordinate to you.

Should my insurance agent be the trustee?

No. The agent has a financial interest in policy sales and replacements that conflicts with the trustee's duty of loyalty. The agent can still advise the trustee.

Do I still need an ILIT now that the federal exemption is $15 million?

Maybe. If your estate, including the face amount of your life insurance, is well below $15 million ($30 million for a married couple) and is not expected to grow beyond it, you may not need an ILIT for estate tax reasons. An ILIT can still be useful for controlling how insurance money is used, protecting it from beneficiaries' creditors and divorces, providing for minors or a beneficiary with special needs, and providing liquidity for business owners and real estate investors.