Many New Yorkers assume life insurance is tax-free. The payout is generally income-tax-free, but the death benefit can still be counted in your taxable estate, and in New York that can matter a great deal. An irrevocable life insurance trust, or ILIT, is the planning tool that keeps a policy out of your estate. Here is how it works, what it costs in effort, and when it pays off.
The Problem an ILIT Solves
If you own your life insurance policy, the death benefit is typically included in your gross estate. A $2 million policy can push a NYC homeowner over the New York estate tax exclusion. For 2026 that exclusion is $7,350,000, and New York applies a cliff: estates above roughly $7,717,500 lose the exclusion entirely and are taxed on the full value. A large insurance payout can be exactly what tips an estate over that edge. An ILIT removes the policy from your estate so the death benefit does not count.
How an ILIT Works
An ILIT is an irrevocable trust under EPTL Article 7 that owns the life insurance policy instead of you. Because you do not own or control the policy, its proceeds are not part of your taxable estate. The trust is both the owner and the beneficiary; when you die, the insurer pays the trust, and the trustee distributes the funds to your loved ones according to your instructions. “Irrevocable” is the key word: you give up the right to change or revoke the trust, which is the price of keeping the policy out of your estate.
New or Existing Policies, and the Timeline
You can fund an ILIT two ways. The cleaner route is to have the trust buy a new policy from the start, so you never personally own it. You can also transfer an existing policy into the ILIT, but federal rules generally pull the proceeds back into your estate if you die within three years of the transfer, so the sooner you act, the better. Setting up an ILIT involves drafting the trust, applying for or transferring the policy, and arranging how premiums will be paid, typically over several weeks.
The Crummey Mechanics
Premiums are usually funded by gifts you make to the trust. To make those gifts qualify for the annual gift tax exclusion, ILITs use what are called Crummey notices, giving beneficiaries a brief window to withdraw the contribution. They typically decline, and the trustee then pays the premium. It is a paperwork rhythm the trustee must follow each year, which is part of the ongoing cost of an ILIT.
Is an ILIT Worth It for You?
An ILIT adds complexity and is irrevocable, so it is not for everyone. It tends to make sense for New York City families whose estates, including a sizable insurance policy, approach or exceed the state exclusion and who want to provide liquidity to pay taxes or support heirs without inflating the taxable estate. For smaller estates, simpler tools may serve.
Consult a New York Attorney
ILITs are powerful but unforgiving once signed. Before creating or transferring a policy, speak with a qualified New York estate planning attorney to confirm an ILIT fits your tax picture and is drafted correctly.
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