Are there specific requirements for an ILIT to be valid in multiple jurisdictions

As an estate planning attorney and CPA with over 35 years of experience, I’ve seen firsthand how quickly a seemingly well-drafted ILIT can unravel when clients move or own property in multiple states. It’s a surprisingly common issue – and the costs can be devastating. I recently worked with Dale, who relocated from California to Florida after establishing his ILIT here. He assumed it would be automatically valid, but when he passed away, the Florida probate court questioned the trust’s validity because it didn’t explicitly address Florida law, costing his family significant legal fees and delaying access to critical funds.

The truth is, establishing an ILIT that’s recognized and enforceable across state lines demands careful planning. While the fundamental principles of trust law are relatively consistent, nuances in each state’s statutes can create roadblocks. Here’s what we need to consider.

Situs and Governing Law

The first and arguably most important step is determining the “situs” of the trust. This refers to the physical location where the trust is administered, and typically, it’s where the trustee resides and conducts business. The situs dictates which state’s laws will primarily govern the ILIT. We usually draft the trust document to explicitly state California law applies, but that’s not always enough. If Dale had included a clear choice-of-law provision and a severability clause (more on that below), his family could have avoided much of the Florida probate challenge.

The Uniform Trust Code (UTC)

Fortunately, many states have adopted the Uniform Trust Code (UTC). This provides a degree of uniformity, simplifying interstate recognition. However, not all states have adopted the UTC in its entirety, and even those that have may have made modifications. This means relying solely on the UTC is risky. We must analyze the specific trust laws of each state where the grantor owns assets or resides.

Ancillary Administration

Even with a validly established ILIT, if the grantor owns real property or other assets in a state different from the trust’s situs, you may encounter “ancillary administration.” This means a separate probate proceeding might be required in that additional state to transfer ownership of those assets into the trust. It adds complexity, cost, and time to the estate settlement process. We mitigate this by using proper deed titling and beneficiary designations, but it’s not a foolproof solution.

Transferring Existing Policies (The “Clawback”)

When transferring existing life insurance policies into an ILIT, timing is critical. Under IRC § 2035, if you transfer an existing life insurance policy into an ILIT and pass away within 3 years, the death benefit is ‘clawed back’ into your taxable estate; to avoid this, the ILIT should purchase the policy directly. This rule applies uniformly across jurisdictions, but the documentation required to prove compliance may vary.

Trustee Selection

Selecting the right trustee is crucial, especially when dealing with multiple jurisdictions. The grantor cannot serve as the trustee of their own ILIT; retaining any ‘incidents of ownership’ (like the power to change beneficiaries) under IRC § 2042 will cause the entire death benefit to be included in the taxable estate. Furthermore, the trustee must be familiar with the laws of the situs and, ideally, have a presence in those states where the grantor owns significant assets. A corporate trustee might be a good solution if you anticipate complications.

Gift Taxes (Crummey Letters)

Maintaining the tax benefits of the ILIT requires diligent compliance with gift tax rules. To ensure premium payments qualify for the Annual Gift Tax Exclusion, the trustee must send ‘Crummey Letters’ to beneficiaries every time a deposit is made, granting them a temporary right to withdraw the funds (typically for 30 days). The format and content of these letters must adhere to the requirements of the IRS, regardless of the state.

Digital Policy Access

In today’s digital world, gaining access to online policy portals and managing premiums can be surprisingly difficult. Without specific RUFADAA language (Probate Code § 870) in the ILIT, service providers and insurers can legally block your trustee from accessing these portals to manage premiums or file claims. This can lead to lapsed coverage and significant financial loss.

Missed Assets (Premium Refunds/Cash)

Sometimes, premium refunds or other cash assets are inadvertently left in the grantor’s name. For deaths on or after April 1, 2025, if cash assets intended for the ILIT were legally left in the grantor’s name (valued up to $750,000), they qualify for a ‘Petition for Succession’ under AB 2016 (Probate Code § 13151). It’s critical to understand the difference: this is a “Petition” (Judge’s Order), not a simple “Affidavit.” The Small Estate Affidavit is not sufficient for these funds to pass outside of probate.

Severability Clause

Finally, always include a severability clause in the ILIT. This provision states that if any part of the trust is deemed invalid under the laws of a particular state, the remaining provisions will still remain in effect. It’s a crucial safeguard against a complete failure of the trust due to a minor legal technicality.

As a CPA, I also emphasize the importance of maximizing the step-up in basis for the life insurance proceeds. Properly structuring the ILIT ensures these assets aren’t unnecessarily included in your taxable estate, preserving more wealth for your heirs. The OBBBA permanently increased the Federal Estate Tax Exemption to $15 million per person effective Jan 1, 2026; however, for High-Net-Worth individuals, life insurance death benefits can easily push an estate over this limit, making an ILIT essential.

What causes California trust administration to fail due to poor funding, vague terms, or trustee misconduct?

The advantage of a California trust is control and continuity, but this relies entirely on accurate funding and disciplined administration. Without clear asset titles and strict adherence to fiduciary standards, a private trust can quickly become a subject of public litigation over mismanagement, capacity, or undue influence.

To close a trust administration smoothly, the trustee must complete the steps of trust settlement, ensure no pending beneficiary claims exist, and distribute assets according to the revocable living trust.

A stable trust administration relies on the trustee’s ability to balance investment duties, beneficiary communication, and tax compliance. When these elements are managed proactively, families can avoid the emotional and financial drain of litigation.

Verified Authority on ILIT Administration & Tax Compliance

• The “3-Year Rule” (IRC § 2035): Internal Revenue Code § 2035
  The critical statute warning that transferring an existing policy to an ILIT triggers a 3-year waiting period. If the grantor dies within this window, the insurance proceeds are pulled back into the taxable estate.
• Incidents of Ownership (IRC § 2042): Internal Revenue Code § 2042
  This code section defines why a grantor cannot be the trustee. Retaining the power to change beneficiaries or borrow against the policy forces the death benefit into the gross estate for tax purposes.
• Annual Gift Exclusion (Crummey Powers): IRS Gift Tax Guidelines (IRC § 2503)
  The legal basis for “Crummey Letters.” Without these withdrawal notices, money contributed to the ILIT to pay premiums does not qualify for the annual gift tax exclusion and eats into the lifetime exemption.
• Estate Tax Exemption (OBBBA): IRS Estate Tax Guidelines
  Reflects the OBBBA permanent increase to a $15 million per person exemption (effective Jan 1, 2026). ILITs remain the primary vehicle for ensuring life insurance proceeds sit on top of this exemption rather than consuming it.
• Missed Asset Recovery (AB 2016): California Probate Code § 13151 (Petition for Succession)
  If “unspent premiums” or refund checks intended for the ILIT were accidentally left in the grantor’s name, this statute (effective April 1, 2025) allows for a “Petition for Succession” for assets up to $750,000, bypassing full probate.
• Digital Policy Access (RUFADAA): California Probate Code § 870 (RUFADAA)
  Without RUFADAA powers, a trustee may be unable to access online insurance dashboards to verify premium payments, potentially causing the policy to lapse.