Irrevocable Life Insurance Trust (ILIT) Attorneys
Life insurance is often the largest single asset a family receives at death, and it is frequently the one that pushes an estate over the estate tax line. An irrevocable life insurance trust, or ILIT, solves that problem. The trust, not you, owns the policy. When you die, the proceeds are paid to the trust for your family, and because you never owned the policy, the proceeds are generally not part of your taxable estate.
An ILIT does more than save tax. It puts the proceeds under a trustee’s management for a surviving spouse, children, or grandchildren, protects them from a beneficiary’s creditors and divorce, and gives your executor a source of cash to pay estate taxes or buy assets from the estate without a forced sale of a business or a home.
Milvidskiy Law Group P.C. designs and drafts ILITs, coordinates the transfer or purchase of the policy, and sets up the annual gifting and notice routine that keeps the trust working. We work alongside your insurance adviser and CPA so that the policy, the trust, and the rest of your plan fit together.
Key Takeaways:
- Life insurance you own is included in your taxable estate at its full death benefit. Insurance owned from the start by a properly drafted ILIT is generally not, which can be the difference between owing estate tax and owing none.
- An ILIT is only as good as its administration. Premiums must be paid through the trust, beneficiaries must receive withdrawal notices for gifts to qualify for the annual exclusion, and the insured cannot keep any control over the policy.
- New York and Connecticut impose their own estate taxes at thresholds well below or equal to the federal exemption, so an ILIT can matter for families who will never owe federal estate tax.
Why Ownership of the Policy Decides Everything
The federal estate tax reaches life insurance on your life if you held any “incident of ownership” at death: the right to change the beneficiary, borrow against the policy, surrender it, or assign it. A policy you own is included at its full face amount, not its cash value. A policy you gave away within three years of death is pulled back in as well.
An ILIT breaks that chain. The trust applies for and owns the policy from the outset, or receives an existing policy by gift and survives the three-year period. The trustee, not you, holds every incident of ownership. You give up the right to change beneficiaries or borrow against the policy; in exchange, the death benefit passes to your family outside the estate tax system.
For 2026 the federal basic exclusion amount is $15,000,000 per person, as published by the Internal Revenue Service, and it is indexed for inflation. Many families sit below that figure and assume estate tax planning is not for them. Two things change the analysis: state estate taxes, and the size of the policy itself. A $3 million death benefit can move a comfortable estate into taxable territory in New York, where the state exclusion is far lower.
How an ILIT Works
Setting up the trust and acquiring the policy
You sign an irrevocable trust naming a trustee, usually an adult child, a trusted relative, or a professional trustee, and naming the beneficiaries, typically your spouse and descendants. The trustee then applies for a new policy on your life, or you assign an existing policy to the trust. A new policy owned by the trust from day one avoids the three-year rule entirely, which is why we prefer that route when health and underwriting allow.
Funding the premiums
Each year you give the trustee enough cash to pay the premium. Those gifts are taxable gifts unless they qualify for the annual exclusion, which is $19,000 per recipient for 2026. A gift to a trust does not qualify on its own; the beneficiaries must have a real, if temporary, right to withdraw their share. That is the purpose of the withdrawal notice, often called a Crummey notice after the case that approved the technique: the trustee tells each beneficiary in writing that a gift has been made and that they may withdraw it for a set period. When the period lapses, the trustee pays the premium.
Gifts above the annual exclusion use part of your lifetime exemption and are reported on a gift tax return. That is often acceptable for large premiums, but it should be a decision, not an accident.
At death
The insurer pays the trust. The trustee then follows the instructions in the document: hold the proceeds in trust for a surviving spouse with income and principal as needed, divide into shares for children at set ages, or keep the funds in a long-term trust for grandchildren. The trustee may also lend money to your estate or purchase assets from it, which puts cash in the executor’s hands to pay taxes and expenses while keeping the proceeds themselves out of the estate.
State Estate Taxes: Why an ILIT Matters in New York and Connecticut
New York imposes an estate tax with a basic exclusion amount of $7,350,000 for deaths in 2026, according to the New York State Department of Taxation and Finance. New York also has a “cliff”: an estate that exceeds the exclusion by more than a small margin loses the benefit of the exclusion entirely and is taxed on the whole estate. A $2 million life insurance policy owned personally can be exactly what pushes a New York estate over that edge. New York has no gift tax, but taxable gifts made within three years of death are added back to the estate, which affects how and when an existing policy is transferred.
Connecticut imposes both an estate tax and a gift tax. For 2026 the Connecticut exemption equals the federal basic exclusion amount of $15,000,000, and the tax on the excess is 12%, with total estate and gift tax capped at $15 million under the statute. Because Connecticut taxes lifetime gifts, premium gifts to an ILIT by a Connecticut resident are counted against the Connecticut exemption as well as the federal one.
New Jersey repealed its estate tax for deaths on or after January 1, 2018 and taxes only inheritances passing to certain classes of beneficiaries. Life insurance payable to a named beneficiary or a trust is generally not subject to the New Jersey inheritance tax, which makes an ILIT for a New Jersey resident mainly a federal estate tax and asset protection tool. Our tax planning page covers the three-state picture in more detail.
Design Choices That Shape the Trust
- Who serves as trustee. Not you, and usually not your spouse if the spouse is a beneficiary with broad rights. An independent trustee avoids inclusion problems and family friction.
- Single life or second-to-die. A survivorship policy on both spouses pays at the second death, when the estate tax is typically due, and often costs less per dollar of coverage.
- How long the trust lasts. A trust that distributes at your death is simple. A trust that continues for children and grandchildren, with generation-skipping transfer tax exemption allocated to it, can shelter the proceeds for decades; see our page on dynasty trusts.
- Spousal access. A trust can give your spouse income and discretionary principal for life while keeping the proceeds outside both spouses’ estates, similar in concept to a spousal lifetime access trust.
- Powers to adapt. A trust protector, the power to swap or replace a policy, and the ability to decant into a new trust let the ILIT adjust to changes in tax law or family circumstances without losing its status. These provisions are part of any well-drafted irrevocable trust.
- Business owners. An ILIT can fund a buy-sell agreement or equalize an inheritance between a child who takes the business and children who do not, which ties it to business succession planning.
Common Mistakes
- Paying the premium yourself. Writing the check directly to the insurer instead of gifting to the trustee undercuts the structure and the annual exclusion.
- Skipping the withdrawal notices. Without them, the gifts may not qualify for the annual exclusion and can quietly consume lifetime exemption.
- Keeping control. Naming yourself trustee, retaining the right to change beneficiaries, or borrowing from the policy can bring the proceeds back into your estate.
- Transferring a policy and dying within three years. The proceeds are included. Where health permits, a new trust-owned policy is safer than a transfer.
- Forgetting the trust exists. ILITs are set up and then ignored for years. Policies lapse, trustees move, beneficiaries change. Annual review through our Client Care Program keeps the trust current.
When an ILIT Is Not the Right Tool
If your estate, including the death benefit, will comfortably sit below both the federal and your state’s exclusion, and you are not concerned about a beneficiary’s creditors or ability to manage a lump sum, the cost and administration of an ILIT may not be justified. If you expect to need the policy’s cash value during your life, an ILIT is the wrong owner, because you cannot reach trust assets. And if the primary goal is Medicaid eligibility rather than estate tax, a Medicaid asset protection trust is built for that job and an ILIT is not. We tell clients plainly when a simpler beneficiary designation will do.
What Our ILIT Service Includes
- An estate tax projection with your CPA and insurance adviser that includes the death benefit, so the decision rests on numbers rather than assumptions.
- Drafting the trust, including trustee succession, spousal access provisions, generation-skipping planning, and powers to adapt.
- Coordinating the application for a trust-owned policy, or the assignment of an existing policy, with the insurer’s forms.
- The annual routine: gift timing, withdrawal notices, trustee instructions, and gift tax return coordination.
- Integrating the ILIT with your will, revocable trust, buy-sell agreement, and beneficiary designations as part of your estate plan.
Schedule a Consultation About an ILIT
If you own life insurance and your estate, with the death benefit counted, approaches the New York, Connecticut, or federal thresholds, an ILIT is worth a conversation before the next premium is paid. Our attorneys practice in New York, New Jersey, and Connecticut. Contact Milvidskiy Law Group P.C. to schedule a consultation.
This page is provided for general informational purposes only and does not constitute legal advice. Laws differ by state and change over time. Tax figures are as of the date stated and change annually. For advice about your situation, consult a qualified attorney.
Frequently Asked Questions
What is an irrevocable life insurance trust?
An ILIT is an irrevocable trust created to own a life insurance policy on your life. Because the trust owns the policy and you hold no rights over it, the death benefit is generally not included in your taxable estate. The trustee receives the proceeds at your death and holds or distributes them for your beneficiaries under the terms you set.
Is life insurance taxable in my estate?
Life insurance proceeds are usually free of income tax to the beneficiary, but they are included in your taxable estate for estate tax purposes if you owned the policy or held rights such as the power to change the beneficiary. For a large policy, that inclusion can create or increase federal, New York, or Connecticut estate tax.
Can I transfer a policy I already own into an ILIT?
Yes, by assigning it to the trustee. The trade-off is the three-year rule: if you die within three years of the transfer, the proceeds are included in your estate anyway. Where health and underwriting allow, having the trust buy a new policy from the start avoids that risk.
What is a Crummey notice?
It is a written notice from the trustee telling each beneficiary that a gift has been made to the trust and that the beneficiary may withdraw a share of it for a limited period. The temporary withdrawal right is what allows the gift to qualify for the federal annual gift tax exclusion, which is $19,000 per recipient for 2026. Without the notices, the gifts may use up lifetime exemption instead.
Who should be the trustee of an ILIT?
Someone other than the insured. Naming yourself defeats the purpose. Many clients name an adult child or a trusted relative; others prefer a professional or corporate trustee for continuity and neutrality. The trustee’s main jobs are to pay premiums from the gifts you make, send the annual notices, and manage the proceeds after death.
Does an ILIT make sense if my estate is under the federal exemption?
It can. New York’s estate tax exclusion for 2026 is $7,350,000, far below the federal figure of $15,000,000, and New York’s cliff can tax the entire estate once it exceeds the exclusion by a small margin. A personally owned policy is often what tips a New York estate over. An ILIT also protects the proceeds from a beneficiary’s creditors and divorce regardless of tax.
Can my spouse benefit from the ILIT?
Yes. A common design gives the surviving spouse income and discretionary access to principal for life, with the remainder passing to children. Done correctly, the proceeds stay outside both spouses’ taxable estates. The spouse’s role as trustee and the scope of the spouse’s rights must be limited carefully to preserve that result.
Can the ILIT help pay estate taxes on my other assets?
Yes, indirectly. The trustee can lend money to your estate or buy assets from it at fair value, which gives your executor cash to pay taxes and expenses without selling a business or real estate under pressure. The trust cannot simply pay the tax directly without risking inclusion, so the document should authorize loans and purchases.
What happens if I stop paying premiums?
The policy may lapse or convert to reduced coverage, and the trust loses its purpose. Before signing, we model whether the premiums are sustainable and whether the policy design fits your cash flow. An ILIT can also be drafted so that the trustee can exchange or replace the policy if a better one becomes available.
Do I need to file a gift tax return for gifts to the ILIT?
If the gifts to the trust in a year exceed the annual exclusion for any beneficiary, or if you want to allocate generation-skipping transfer tax exemption to the trust, a federal gift tax return is filed. Connecticut residents may also have Connecticut gift tax reporting. We coordinate the returns with your CPA each year.
