Denver Irrevocable Life Insurance Trust Attorney
If one of your family’s major estate planning goals is to minimize estate taxation, you should contact our Denver irrevocable life insurance trust attorneys.
For the past 21 years, attorney Karen L. Brady has built lasting relationships with our clients by advising them on all aspects of estate planning and estate administration. She is the author of the book Estate Planning & Taxation in Colorado. She can recommend and explain the benefits of an irrevocable life insurance trust, or ILIT, as a means of achieving your objective.
Life insurance can help you to plan for estate taxation issues down the road. Yet life insurance may be counted as part of your estate and thus add to your estate tax liability. It can be a vicious cycle – you buy more life insurance to pay estate tax and your estate will have to be more taxed, so you have to buy more life insurance, and so on. Putting your life insurance into an irrevocable life insurance trust is a wise strategy, but a complex and often overlooked one.
Do not assume that your life insurance is not subject to estate taxation. Get the facts you need for sound decisions about your family’s future by contacting us today for an initial consultation.
How Irrevocable Life Insurance Trusts Remove Life Insurance Proceeds from a Taxable Estate in Colorado
Life insurance death benefits are generally received by beneficiaries free of federal income tax. But estate tax is a different issue. If the insured owns the policy or retains certain rights over it at death, the value of the death benefit may be included in the insured’s estate for federal estate tax purposes.
This distinction can be important. A Colorado resident might have an estate that appears to fall below the federal estate tax exemption based on investments, real estate, retirement accounts, and business interests, but a substantial life insurance policy can push the value of the taxable estate much higher.
A properly structured and administered irrevocable life insurance trust, commonly called an ILIT, can prevent that result. Rather than the insured owning the policy, the ILIT owns it. The trustee controls the policy, and the ILIT is generally named as the beneficiary. Because the insured has given up what the tax law calls “incidents of ownership” over the policy, the insurance proceeds can potentially pass outside the insured’s taxable estate.
This does not mean the family loses the benefit of the insurance. After the insured’s death, the trustee receives the proceeds and administers them according to the trust agreement. The funds might be held in trust for a spouse or descendants, distributed according to specified terms, or used to provide liquidity to the insured’s estate.
Why Choose Us?
Facets of irrevocable life insurance trusts that we can discuss with you include:
- Transfer of proceeds to your survivors without increasing your taxable estate
- Purchase of insurance and payment of annual premiums
- Lifetime gift tax credits
- Direct distribution of proceeds into the trust
- Funds that can purchase property and pay taxes or other expenses
- Distribution of insurance proceeds to individuals and entities
- Naming of policy beneficiaries that will provide the most protection against estate taxation
Setting this strategy into motion is a highly technical procedure and no do-it-yourself project. Skilled estate planning lawyers can help establish, structure and administer the irrevocable life insurance trust that is appropriate for your family’s unique needs.
Together, we can create something useful for those you care about most.
How an ILIT Is Set Up and Administered in Colorado
An ILIT is not simply a life insurance policy with a different beneficiary designation. It is a separate irrevocable trust with its own trustee, beneficiaries, administrative requirements, and estate and gift tax considerations.
Establishing the Trust
An attorney first prepares an irrevocable trust agreement identifying the trustee, beneficiaries, distribution provisions, and the powers and responsibilities of the trustee. Like other Colorado trusts, an ILIT must satisfy the requirements of the Colorado Uniform Trust Code. The terms must also be carefully designed around federal estate and gift tax rules.
The person whose life is insured generally should not retain rights that amount to ownership or control over the policy. For example, retaining the ability to change beneficiaries, cancel the policy, borrow against it, or otherwise control important policy rights can cause the insurance proceeds to be included in the insured’s taxable estate.
Once the trust exists, the trustee may apply for and purchase a new policy on the insured’s life. Having the ILIT acquire a new policy from the beginning is often simpler from an estate tax standpoint than transferring an existing policy.
Funding Premium Payments and Crummey Notices
Although the ILIT owns the insurance policy, someone still has to provide the money to pay the premiums. Typically, the person creating the ILIT makes cash gifts to the trust and the trustee uses that money to pay the insurance company.
Those contributions are gifts for federal gift tax purposes. One common ILIT strategy is designed to allow the gifts to qualify for the federal annual gift tax exclusion.
In 2026, an individual may generally make up to $19,000 of annual-exclusion gifts to each recipient. However, the annual exclusion normally applies only to gifts of a present interest. To be a present interest the recipient must have a current right to use or enjoy the property. A gift to a trust that beneficiaries cannot access until years in the future would ordinarily be considered a future-interest gift and would not qualify.
ILITs frequently address this issue through temporary withdrawal rights known as Crummey powers. After a contribution is made to the ILIT, the trustee notifies designated beneficiaries that they have a limited period in which they may withdraw their share of the contribution. That notice is commonly called a Crummey notice.
Providing the beneficiary with a genuine right to withdraw the contribution can cause the gift to qualify as a present-interest gift. If the withdrawal period expires without the beneficiary exercising that right, the trustee can then use the money to pay the insurance premium.
Not every ILIT must use Crummey powers. They are primarily important when annual-exclusion treatment is part of the funding strategy. The trust agreement, number of beneficiaries, premium amount, and other gifts being made by the insured should all be considered.
Ongoing Duties of the ILIT Trustee
Creating an ILIT is only the beginning. The trust must also be properly administered.
Depending upon the terms of the trust, the trustee’s responsibilities may include:
- Maintaining appropriate trust records
- Receiving contributions from the person funding the trust
- Sending timely Crummey notices when withdrawal rights are being used
- Allowing beneficiaries the required withdrawal period
- Paying life insurance premiums from the trust
- Monitoring the policy and confirming that it remains in force
- Keeping trust property separate from the insured’s personal assets
- Avoiding actions that could give the insured impermissible control over the policy
- Handling tax reporting when required
These administrative steps matter. An ILIT should not be treated as a document that is signed, placed in a file, and forgotten.
What Happens When the Insured Dies?
At the insured’s death, the insurance company pays the death benefit to the ILIT as policy beneficiary. Assuming the arrangement has been properly structured, the proceeds are generally not included in the insured’s gross estate merely because the insured was the person whose life was covered.
The trustee then follows the distribution provisions of the trust.
That does not necessarily mean immediately distributing the entire insurance benefit to family members. An ILIT can provide continuing trusts for a spouse, children, grandchildren, or other beneficiaries. Depending upon the planning objectives, the trustee may also be authorized to purchase assets from the insured’s estate or loan money to the estate. This can provide cash to pay estate taxes, expenses, or other obligations without making the insurance proceeds themselves payable directly to the estate.
When an ILIT Makes Sense and When It Does Not
ILITs are powerful planning tools, but they are not appropriate for everyone.
For 2026, the federal estate and gift tax basic exclusion amount is $15 million per individual. Married couples may have substantially greater combined protection when available exemptions and portability are properly used. Colorado currently imposes neither a separate state estate tax nor an inheritance tax.
As a result, many Colorado families do not need an ILIT solely for estate tax avoidance.
However, determining whether an ILIT is worthwhile requires looking beyond a person’s current net worth. Life insurance proceeds themselves may increase the size of the estate, and appreciating investments, business interests, real estate, retirement assets, and future inheritances can substantially change the picture over time.
For example, someone with a $12 million estate and a $5 million personally owned life insurance policy may have a very different estate tax exposure than the $12 million figure initially suggests.
An ILIT may therefore be worth considering when:
- An estate is already near or above the federal estate tax exemption
- A large insurance death benefit could push the estate above the exemption
- Assets are expected to appreciate substantially
- The insured owns a rapidly growing business or other appreciating assets
- Family wealth is expected to increase through future inheritances
- The family wants insurance proceeds managed in trust rather than distributed outright
- Estate liquidity is an important part of the planning strategy
What Are the Trade-Offs?
The principal disadvantage of an ILIT is contained in its name: it is irrevocable.
The insured generally cannot retain the same flexibility that comes with personally owning an insurance policy. The insured should not have the ability to freely change beneficiaries, take loans against the policy, surrender the policy for cash, or reclaim ownership simply because circumstances change.
There are also administrative responsibilities. Premium contributions may need to be coordinated with the trustee, notices may have to be given to beneficiaries, records should be maintained, and the policy should be periodically reviewed.
For estates well below any reasonable projected estate tax exposure, that added complexity may produce little tax benefit. The appropriate question is not simply, “Can we create an ILIT?” but rather, “Does giving up control and accepting the administrative requirements solve a meaningful estate planning problem for this family?”
Can an Existing Life Insurance Policy Be Transferred to an ILIT?
Yes, but transferring an existing policy raises an important federal estate tax issue.
If an insured transfers an existing life insurance policy and dies within three years after the transfer, federal law can cause the death benefit to be included in the insured’s gross estate despite the transfer to the ILIT. This is commonly referred to as the three-year rule.
The transfer itself can also constitute a taxable gift based upon the value of the policy.
For those reasons, an ILIT purchasing a new policy from the beginning may be preferable when circumstances permit. There is generally no corresponding three-year waiting period simply because a properly structured ILIT purchased and owned a new policy from its inception.
What Happened to the 2026 Estate Tax “Sunset”?
For several years, estate planners anticipated a major reduction in the federal estate and gift tax exemption beginning in 2026. Earlier federal law provided that the increased exemption created in 2017 would expire after 2025.
That scheduled reduction no longer applies.
Federal tax legislation enacted in 2025 established a $15 million basic exclusion amount beginning in 2026, with inflation adjustments in future years. Under current law, there is no scheduled sunset that automatically reduces the exemption after 2026.
That change means ILIT planning is less urgent for some families whose primary concern was the anticipated drop in the exemption. It does not make ILITs obsolete. Families with estates approaching the new exemption, significant life insurance, rapidly appreciating assets, or other wealth-transfer objectives should still evaluate whether insurance ownership belongs outside the taxable estate.
Tax laws can also be changed by future legislation, so estate plans for families with significant wealth should be reviewed periodically rather than built around assumptions that today’s exemption will remain unchanged forever.
FAQ: Common Questions About ILITs in Colorado
Can an ILIT be changed or revoked after it is established?
An ILIT is intended to be irrevocable, so the person creating it generally cannot simply revoke it or rewrite its terms whenever circumstances change. Colorado trust law does provide mechanisms that may allow some irrevocable trusts to be modified or terminated under particular circumstances, but those options depend upon the trust terms, the parties involved, and the applicable tax consequences. Flexibility should therefore be considered when the ILIT is originally designed rather than assumed to be available later.
Who pays income taxes on an ILIT in Colorado?
Life insurance proceeds paid because of the insured’s death are generally excluded from federal income tax. That is separate from the estate tax question that the ILIT is designed to address.
An ILIT can have income tax obligations in other circumstances. For example, after receiving the insurance proceeds, the trust may earn interest, dividends, or investment income. The taxation of that income depends upon the structure of the trust and whether income is retained or distributed. Income tax treatment should be reviewed with the family’s tax advisor as part of trust administration.
How much does it cost to set up and administer an ILIT in Colorado?
There is no single standard price because ILITs vary considerably. Costs depend upon the complexity of the family situation, the insurance arrangement, tax planning involved, trustee structure, and whether additional planning is incorporated into the trust. Families should also consider ongoing administration, including premium management, beneficiary notices, tax preparation when necessary, and periodic review of the insurance policy and estate plan.
What is the difference between an ILIT and a standard life insurance beneficiary designation?
A beneficiary designation tells the insurance company who receives the death benefit. It does not by itself change who owns the policy for estate tax purposes.
If you own a policy on your own life but name your children as beneficiaries, the proceeds may still be included in your taxable estate because you retained ownership rights over the policy.
With a properly structured ILIT, the trust owns the policy and is generally the beneficiary as well. The insured gives up the ownership rights that could otherwise cause the death benefit to be included in the taxable estate. The trust also allows the proceeds to be managed and distributed according to detailed instructions rather than simply being paid outright to the named beneficiaries.
Contact Our Denver Irrevocable Life Insurance Trust Attorney
Our law firm serves clients in Colorado cities such as Arvada, Denver, Thornton, Lakewood, Wheat Ridge, Louisville, Broomfield, Golden, Superior, Westminster, Littleton, Genesee, Evergreen, Lafayette, Northglenn, Commerce City, and others throughout Arapahoe County, Denver County, Jefferson County, Adams County, Clear Creek County, and Gilpin County. Learn more about irrevocable life insurance trusts, estate taxes, and how to prepare for your family’s future. Contact our skilled Arvada estate planning attorneys at (303) 420-2863.
