DAG

ILIT for Crypto & PPLI Policies

An ILIT for crypto is an irrevocable life insurance trust that owns a life-insurance or private placement life insurance (PPLI) policy instead of the insured owning it personally. Because the trust is the owner and beneficiary, the death benefit can pass to heirs outside the insured's taxable estate, which is the core reason crypto-wealthy families use one alongside trusts and LLCs.

What Is an ILIT, and Why Pair It With Crypto Wealth?

An irrevocable life insurance trust is a trust created specifically to own a life-insurance policy. The insured (the grantor) gives up control: the trust cannot be amended or revoked at will, an independent trustee administers it, and the policy proceeds belong to the trust's beneficiaries. That loss of control is the price of the benefit. When a policy is owned by the insured, the death benefit is generally included in the gross estate under IRC §2042 and can be exposed to federal estate tax. When an ILIT owns the policy from the start, the proceeds are generally kept outside the estate.

For a crypto holder, the connection is indirect but practical. Digital-asset wealth is often concentrated and illiquid, and a large estate-tax bill can force heirs to sell coins at a bad time. A policy owned by an ILIT can supply tax-advantaged liquidity to the estate without adding the death benefit back into the taxable estate. The policy itself can be ordinary permanent insurance or PPLI; the ILIT is the wrapper, not the policy. This is the trust-wrapper angle, distinct from the policy-mechanics questions covered in private placement life insurance and the difference between PPLI and IUL.

How Does an ILIT Keep the Death Benefit Out of the Estate?

The mechanism is ownership plus incidents of control. If the insured holds any "incidents of ownership" in the policy, the right to change beneficiaries, borrow against cash value, or surrender it. IRC §2042 pulls the proceeds into the estate. An ILIT removes those incidents by making the trust the owner from inception.

Two rules drive how the trust is set up:

  • Three-year lookback (IRC §2035). If you transfer an existing policy you already own into an ILIT and die within three years, the proceeds are pulled back into your estate as if the transfer never happened. Buying a new policy that the ILIT applies for and owns from day one avoids this lookback, which is why new-policy structuring is common.
  • Independent trustee. The insured generally should not serve as trustee, because a trustee's powers can themselves be treated as incidents of ownership. An independent trustee (an individual who is not the insured or a professional/corporate trustee) administers the trust, pays premiums, and handles notices.

Crummey Powers: Funding Premiums Without Burning Estate Exemption

Premiums paid into an ILIT are gifts to the trust. To make those gifts qualify for the annual gift-tax exclusion (an inflation-adjusted per-recipient amount; verify the current figure with the IRS), beneficiaries are typically given a temporary right to withdraw the contribution. This is a Crummey withdrawal power, named for the case that established it. The trustee sends beneficiaries a "Crummey notice" when a contribution is made; the beneficiaries let the window lapse; the gift then qualifies for the exclusion and the trustee uses the funds to pay the premium.

Without functioning Crummey powers, premium gifts are "future interests" that do not qualify for the annual exclusion and instead consume lifetime gift/estate exemption. Documenting the notices each year is an administrative obligation that does not go away.

Funding premiums from crypto-derived liquidity

An ILIT pays premiums with cash, so crypto generally has to become dollars somewhere upstream. Common patterns include gifting cash from already-realized gains, or using crypto-backed borrowing to raise premium dollars without an outright sale, see bitcoin-backed loan vs selling bitcoin. Selling appreciated tokens to fund premiums is a taxable event; borrowing adds margin-call and interest-rate risk. There is no structure that makes premium funding tax-free, and the right path depends on your facts and on coordination among insurance, tax, and legal professionals.

PPLI Inside an ILIT

PPLI can be the policy an ILIT owns, which combines the trust's estate-tax positioning with PPLI's investment flexibility. The eligibility and compliance gates of PPLI still apply in full and are not relaxed by the trust wrapper:

  • PPLI is a securities product generally available only to accredited investors and qualified purchasers.
  • The policy must satisfy IRC §817(h) diversification and avoid violating the investor-control doctrine. If those rules fail, the policy can lose its insurance tax treatment entirely, and the trust wrapper does not cure that.

So an ILIT-owned PPLI policy carries two layers of complexity: getting the trust right (irrevocability, trustee, Crummey administration, §2035 timing) and getting the policy right (eligibility, §817(h), investor control). Both have to hold.

ILIT Setup Checklist (Discussion Points for Your Advisors)

  • Confirm the goal: estate-tax liquidity, wealth transfer, or both, and whether an ILIT is warranted at your estate size.
  • Decide new policy vs. transferring an existing one (the §2035 three-year lookback applies only to transfers).
  • Select an independent trustee; confirm the insured holds no incidents of ownership.
  • Build the Crummey notice process and calendar it annually.
  • Plan premium funding sources (realized cash, gifting strategy, or crypto-backed borrowing) and the tax cost of each.
  • If using PPLI, separately verify accredited-investor / qualified-purchaser status and the policy's §817(h) and investor-control compliance.
  • Coordinate the ILIT with the rest of the plan via the Crypto Trust Structures Hub and how to fund a trust with crypto.

Related Questions

Can an ILIT own a PPLI policy?

Yes. An ILIT can apply for and own a PPLI policy so that the trust gets the estate-tax positioning while the policy provides investment flexibility. The PPLI eligibility rules still apply: the policy must meet accredited-investor and qualified-purchaser requirements and satisfy IRC §817(h) diversification and the investor-control doctrine. The trust does not waive those gates.

Does transferring my existing crypto-funded policy into an ILIT work right away?

Not immediately for estate-tax purposes. Under IRC §2035, if you transfer an existing policy into an ILIT and die within three years, the death benefit is pulled back into your taxable estate. Having the ILIT buy a new policy from inception avoids the three-year lookback. Discuss timing with your estate attorney.

Why can't I be the trustee of my own ILIT?

If the insured serves as trustee, the trustee's powers over the policy can be treated as incidents of ownership under IRC §2042, which can defeat the estate-tax exclusion the ILIT was created to achieve. An independent trustee administers the trust, pays premiums, and sends Crummey notices. The specific drafting is a job for a licensed estate attorney.

How is an ILIT different from a revocable trust holding crypto?

An ILIT is irrevocable and built around owning an insurance policy to push the death benefit outside the estate; a revocable trust is changeable and does not provide that estate-tax exclusion. For the broader comparison, see revocable vs irrevocable trusts for crypto assets.

Sources

Compliance Note

This page is educational and does not provide insurance, legal, tax, or investment advice, and is not an offer or solicitation for any insurance or securities product. An ILIT is an irrevocable trust: once funded you give up control, and the structure must be drafted and administered correctly to achieve any estate-tax result. The three-year lookback under IRC §2035, Crummey withdrawal mechanics, and trustee selection all affect the outcome, and rules and exemption amounts change, any figures here are illustrative and should be verified with current IRS guidance. PPLI is restricted to accredited investors and qualified purchasers and must satisfy IRC §817(h) diversification and the investor-control doctrine; failing those rules can forfeit the policy's tax treatment, and the trust wrapper does not cure that. Trust drafting and insurance placement are licensed professional and legal services. DAG Insurance coordinates these services; it does not provide legal, tax, or insurance advice. Advisory services are offered through DAG Wealth. Registration does not imply a certain level of skill or training.

Disclosures

DAG Holdings Co is a holding company that does not provide investment advisory, brokerage, administrative, or insurance services to clients. DAG is not a law firm, does not provide legal or tax advice, and does not provide tax preparation services. Tax matters are handled through referrals to qualified independent tax professionals.

DAG Private Client services involve estate matters that require qualified independent counsel in the applicable jurisdiction. LLC formation, trust drafting, and estate planning services are provided in coordination with or by qualified independent legal counsel licensed in the applicable jurisdiction.

Asset protection structures, including Wyoming LLCs and trusts, do not guarantee protection against all claims, creditors, or losses. Outcomes depend on specific facts, jurisdiction, and applicable law.

Insurance products and services are offered through Xure Insurance or its affiliates.

Investment advisory services are offered exclusively through DAG Wealth, an SEC-Registered Investment Adviser (CRD No. 328627). Registration with the SEC does not imply a particular level of skill or training. Form ADV and Form CRS are available upon request or at www.adviserinfo.sec.gov.

Custody arrangements with third-party independent qualified custodians reduce certain risks but do not eliminate them.

Investing in digital assets involves risk, including the possible loss of principal. Digital assets are highly volatile and may not be suitable for all investors. Past performance is not indicative of future results.

Specific fee schedules, scope of engagement, conflicts of interest, and material business practices are disclosed in writing before engagement and in Form ADV Part 2A for the investment-advisory portion.

The information on this site is for general educational purposes and is not legal or tax advice.