Without an ILIT, a $5M life insurance policy on a NY resident with a $7M estate can push the estate over the cliff and cost the family roughly $1M in unnecessary state estate tax. The fix is to make sure the insured does not own the policy — that is the job of an ILIT.
Key Points
If the ILIT applies for a new policy, the death benefit is excluded from the estate from day one. If you transfer an existing policy into the ILIT, IRC §2035 pulls it back into the estate if you die within three years. For sizable existing policies we often sell the policy to the ILIT (grantor-trust transaction) to avoid the 3-year rule.
Each annual premium gift to the ILIT must be accompanied by Crummey notices to the beneficiaries giving them a temporary right to withdraw. The withdrawal right makes the gift a present interest eligible for the annual exclusion. Skipping or sloppily documenting Crummey notices is one of the most common ILIT failures the IRS challenges.
Frequently Asked
Naming a trust as beneficiary affects where the proceeds go, but it does not change estate inclusion — the policy itself is still owned by the insured and the death benefit is in the estate. The ILIT must own the policy from the start (or for at least 3 years before death).
No. The insured cannot be trustee — incidents of ownership pull the policy back into the estate. The trustee is typically a spouse, adult child, professional fiduciary, or independent corporate trustee.
Next Step
Fixed-fee estate planning for clients in New York, New Jersey, and Ohio.
Drew Jacobs is licensed in New York, New Jersey, and Ohio. Nothing on this page constitutes legal advice or an offer to represent you in a jurisdiction in which we are not licensed.