--- title: "Should Your Life Insurance Be in a Trust? | Legacy Counsel" description: "How an irrevocable life insurance trust keeps a death benefit out of your taxable estate, and the rules that make or break it." lang: en json-ld: | [ { "@context": "https://schema.org", "@graph": [ { "@type": "LegalService", "@id": "https://jacobslegacycounsel.com/#legalservice", "name": "Jacobs Legacy Counsel", "alternateName": [ "Legacy Counsel by Jacobs Counsel", "Jacobs Legacy" ], "url": "https://jacobslegacycounsel.com", "description": "Fixed-fee estate planning for high-net-worth families, founders, executives, and professional athletes. 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An irrevocable life insurance trust (ILIT) owns the policy instead, keeping the death benefit outside your estate, shielding it from beneficiaries' creditors and divorces, and allowing staged payouts. Three rules control the outcome: transferring an existing policy in and dying within three years pulls it back into the estate, you cannot retain control as trustee or change beneficiaries, and premium gifts plus Crummey notices must be administered every year. ILITs fail on maintenance more often than on drafting.", "datePublished": "2026-06-20", "dateModified": "2026-08-12T16:48:24.041687+00:00", "author": { "@type": "Person", "@id": "https://jacobscounsellaw.com/about/drew-jacobs#person", "name": "Andrew R. 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It also provides creditor protection and controlled distributions." } }, { "@type": "Question", "name": "What are Crummey notices?", "acceptedAnswer": { "@type": "Answer", "text": "Annual written notices to beneficiaries of their temporary withdrawal right, which qualifies premium gifts for the annual exclusion. Skipping them creates gift tax problems." } }, { "@type": "Question", "name": "Can an ILIT be undone?", "acceptedAnswer": { "@type": "Answer", "text": "Not freely — it is irrevocable. Policies can sometimes be allowed to lapse, sold, or a trust modified under state law, but plan as though the decision is permanent." } } ] } ] ] --- A Practice of [Jacobs Counsel LLC](https://jacobscounsellaw.com) Serving NY · NJ · OH — Vol. 2026 [Legacy Counsel ](/) Firm Resources Estate Planning Trusts [Probate & Admin](/probate-trust-administration)[Pricing](/pricing)[Book Call](https://cal.com/drewjacobs/estate-planning)[Start Intake](/get-started) Menu 1. [Home](/) 2. [Journal](/blog) 3. Life Insurance Trust Ilit HOW IT Works [← Legacy Journal](/blog)Estate Planning · Advanced # Should Your Life Insurance Be in a Trust? How an irrevocable life insurance trust keeps a death benefit out of your taxable estate, and the rules that make or break it. June 20, 2026 7 min read By Drew Jacobs, Esq. The short answer Life insurance is income-tax-free to beneficiaries but is included in your taxable estate if you own the policy at death. An irrevocable life insurance trust (ILIT) owns the policy instead, keeping the death benefit outside your estate, shielding it from beneficiaries' creditors and divorces, and allowing staged payouts. Three rules control the outcome: transferring an existing policy in and dying within three years pulls it back into the estate, you cannot retain control as trustee or change beneficiaries, and premium gifts plus Crummey notices must be administered every year. ILITs fail on maintenance more often than on drafting. Life insurance proceeds are income-tax-free to your beneficiaries. They are not estate-tax-free. If you own the policy at death, the full death benefit counts in your taxable estate — which is how a $3 million policy quietly pushes a New York estate past the [cliff](/blog/new-york-estate-tax-cliff). ## What an ILIT does An irrevocable life insurance trust owns the policy instead of you. Structured and administered correctly, the death benefit sits outside your estate, arrives free of estate tax, is protected from beneficiaries' creditors and divorces, and can be paid out over time rather than in a lump sum to a young adult. ## The rules that matter - **Three-year rule:** transferring an existing policy into an ILIT and dying within three years pulls the proceeds back into your estate. A new policy purchased by the trustee avoids this entirely. - **No retained control:** you cannot be trustee, cannot change beneficiaries, and cannot borrow against the policy. That is the price of exclusion. - **Premium funding:** gifts to the trust must be handled with annual exclusion planning and, where applicable, Crummey notices. - **Administration:** a separate trust account, notices actually sent, and premiums actually paid. ILITs fail on maintenance far more often than on drafting. ## Who this is for Families whose taxable estate approaches New York's threshold once insurance is counted, business owners funding a buy-sell, anyone whose estate will need liquidity to pay tax or debts without selling assets, and parents who want a large death benefit managed rather than handed over. If your estate is comfortably below the thresholds, a properly designated beneficiary is often enough. ## Next step [See how we structure ILITs](/ilit-attorney) or [book a consultation](/contact). Educational information only, not legal or tax advice. Federal and state exemption amounts change; confirm current figures before acting. Prior results do not guarantee a similar outcome. Frequently asked ## Questions we hear most Can I move my existing policy into an ILIT? Yes, but the three-year rule applies — if death occurs within three years of the transfer, the proceeds are generally pulled back into the taxable estate. Can I be the trustee of my own ILIT? No. Serving as trustee is retained control, which defeats the exclusion the trust exists to achieve. Is an ILIT worth it below the federal exemption? Often yes in New York, where the state threshold and its cliff are far lower than the federal exemption. It also provides creditor protection and controlled distributions. What are Crummey notices? Annual written notices to beneficiaries of their temporary withdrawal right, which qualifies premium gifts for the annual exclusion. Skipping them creates gift tax problems. Can an ILIT be undone? Not freely — it is irrevocable. Policies can sometimes be allowed to lapse, sold, or a trust modified under state law, but plan as though the decision is permanent. Free Download ### The Estate Planning Checklist A practical checklist covering documents, titling, beneficiary designations, and the funding steps most plans skip. Written for NY, NJ, and OH families. Send it to me Educational material only — not legal advice. Requesting the guide does not create an attorney-client relationship. We do not sell or share your email. Estate Planning Assessment ### Not sure what you need yet? A short, private assessment maps your situation to the documents and structures worth discussing — wills, revocable trusts, irrevocable planning, or administration support. [Take the 2-minute assessment →](/quiz/estate-planning) Educational only. Completing the assessment does not create an attorney-client relationship. 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