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 is powerful and genuinely complicated — the wrong structure can create the very tax it was meant to avoid. It belongs with a specialist, and this page’s job is only to tell you the regime exists and which regulations govern it, so you can ask about it by name.

The premium mechanics

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.

Sources & methodology