An irrevocable life insurance trust (ILIT) can keep a large death benefit out of a client’s taxable estate, but only if it’s administered correctly year after year. That makes the choice of trustee one of the most important decisions in the plan. Here’s how individual and corporate trustees compare, and the duties either one must handle.
Key takeaways
- The trustee must actually receive gifts, send Crummey notices and pay premiums; shortcuts like having the grantor’s business pay the carrier directly invite IRS challenges.
- Family members and friends cost little but may lack the time, expertise or longevity to administer the trust for decades.
- Corporate trustees charge fees but bring continuity, recordkeeping and objectivity, and some families use a hybrid approach.
If premium dollars simply fly over the trust each year, the IRS has a strong argument that the beneficiaries’ present interest is an illusion.
What an ILIT trustee actually has to do
Whoever serves as trustee takes on real, recurring responsibilities:
- Maintain a trust bank account and receive the grantor’s annual gifts into it
- Send timely Crummey notices informing beneficiaries of their right to withdraw contributions
- Be able to honor a withdrawal request if a beneficiary exercises it
- Pay premiums from the trust account to the carrier
- Keep records, file any required returns, and review the policy’s performance
- Collect and distribute the death benefit according to the trust terms
A properly drafted ILIT allows the trustee to buy insurance on the grantor but doesn’t require it, which helps avoid any argument that the grantor controls the policy.
The shortcut that creates risk
It’s tempting to skip the trust account and have the grantor, or the grantor’s business, pay the carrier directly. There is at least one IRS private letter ruling in which the Service recharacterized that kind of payment as income to the grantor, a gift to the trust and a premium payment by the trustee, without finding an incident of ownership. But relying on that reasoning is risky.
If annual exclusion gifts are part of the plan, the beneficiaries’ withdrawal right has to be real. When the only trust asset is the policy and cash never passes through the trust, the present interest needed for the exclusion can be challenged. Direct payments can also suggest the grantor is effectively forcing the trustee to buy coverage.
Individual trustees: pros and cons
Clients often name a sibling, adult child, friend or godparent of the beneficiaries.
- Advantages: little or no cost, personal knowledge of the family, and flexibility.
- Drawbacks: limited expertise, competing priorities, and the risk that they move, retire, become ill or simply forget to pay a premium years down the road.
An individual trustee should not be the insured, and naming a beneficiary as trustee requires careful drafting. Successor trustees should always be named.
Corporate trustees and hybrid approaches
A bank or trust company brings continuity, established procedures and objectivity, which can be valuable for large policies or families with potential conflicts. The trade-off is annual fees, sometimes subject to minimums, and a less personal relationship.
Some families split the roles: a corporate trustee handles administration while a trusted individual serves as co-trustee or trust protector. Whatever the choice, the insurance advisor isn’t legally responsible for trust administration, but an annual check that premiums, notices and records are in order is good client service. Our articles on grantor trusts and estate tax liquidity cover related planning, and our Advanced Markets team is available for trust casework.
Frequently asked questions
Can the insured be the trustee of their own ILIT?
Generally no. Serving as trustee could give the insured incidents of ownership in the policy and pull the death benefit back into their taxable estate.
What are Crummey notices?
Written notices telling ILIT beneficiaries they have a limited time to withdraw contributions made on their behalf. They help gifts to the trust qualify for the annual gift tax exclusion.
When does a corporate trustee make sense?
Often for large policies, long time horizons, blended families or situations where no family member has the time or objectivity to administer the trust reliably.
Reviewed by Tim Fuller on 2026-09-26
Tim Fuller
President, SRS Inc.
Tim leads SRS Inc., a full-service IMO (Independent Marketing Organization) and BGA (Brokerage General Agency), connecting independent financial professionals with life, annuity, disability income, and long-term care solutions from 60+ carrier partners.
Connect on LinkedIn →We’re Here to Help
Have a question about what you just read, or a case you’re working on? Tell us a bit about what you need, and a member of the SRS team will follow up with you personally — no obligation, no hassle.
