Funding an ILIT: Annual Gifts, Split-Dollar, and the Seed Problem

Annual-exclusion gifting

The backbone of most ILIT funding is the annual gift-tax exclusion. It lets you give a set amount to each of any number of people every year with no gift tax and without touching your lifetime exemption. For 2026 the annual exclusion is $19,000 per recipient — unchanged from 2025 — as set by the IRS’s annual inflation adjustments (Rev. Proc. 2025-32; the figure is also listed on the IRS’s “What’s New — Estate and Gift Tax” page). The exclusion is indexed for inflation from a $10,000 statutory base (IRC § 2503(b)) and does not rise every year — it held flat at $19,000 into 2026.

Because the exclusion is per recipient, an ILIT with several beneficiaries holding withdrawal rights can absorb several multiples of $19,000 in exclusion-qualified gifts each year — often enough to cover a substantial premium without any gift tax or any use of the lifetime exemption.

Gift-splitting between spouses

A married couple can double the exclusion available for gifts to the trust. Under the gift-splitting election, a gift made by one spouse can be treated as made one-half by each — so a gift is covered by two annual exclusions instead of one (IRC § 2513). In 2026 that turns the effective exclusion into $38,000 per recipient for a consenting couple, even if only one spouse actually has the money.

Gift-splitting is not automatic. Both spouses must be U.S. citizens or residents, both must consent, and the election is made on a federal gift-tax return (Form 709). For a couple funding a larger premium, filing the return to elect splitting is routine — but it is a return that has to be filed, not a box you can skip.

The lump-sum seed

Sometimes annual gifts are not enough, or a trust needs money up front — to pay a first large premium, or to hold a reserve. A larger one-time contribution, a “seed,” can do that. A seed above the annual exclusion is a taxable gift: it does not create gift tax immediately (your lifetime exemption absorbs it), but it must be reported on a gift-tax return (Form 709), and it uses up part of the $15 million exemption you might otherwise leave for your estate.

Split-dollar for larger premiums

When a premium is large enough that annual-exclusion gifting can’t comfortably cover it, a split-dollar arrangement can share the cost between you (or your business) and the trust, rather than funding the whole premium with gifts. The tax treatment is governed by a detailed set of Treasury regulations that define two mutually exclusive regimes:

• The economic-benefit regime — the party paying the premium is treated as providing the trust a measurable economic benefit each year, which is taxed (Treas. Reg. § 1.61-22).
• The loan regime — the premium payments are treated as a series of loans to the trust, subject to below-market-interest rules (Treas. Reg. § 1.7872-15).

Split-dollar arrangements are complex, and the wrong structure can create the tax it was meant to avoid. Consult a specialist about the applicable regulations before using one.

How annual premiums are paid

Put together, the annual routine looks like this: you make a gift to the trust’s own bank account (kept separate from your money); the trustee sends the beneficiaries their Crummey notices; the withdrawal window runs and lapses; and the trustee pays the premium to the insurer from the trust account. The order matters — the money should reach the trust, and the notices should go out, before the trustee pays the premium, so that the present-interest treatment is clean. Doing it in the wrong order, or paying the insurer directly, is a common way to weaken the structure.

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