Life Insurance Trusts (ILITs), Explained

An Irrevocable Life Insurance Trust, or ILIT, is a planning tool New Yorkers use to keep life insurance proceeds out of their taxable estate. Because New York has its own estate tax with a sharp “cliff,” the policy you bought to protect your family can ironically push your estate over a threshold. Here is a practical checklist for how an ILIT works.

Why the Death Benefit Is Counted

If you own a life insurance policy at death, the full death benefit is included in your gross estate. For a New York resident in 2026, the state estate tax exclusion is $7,350,000, and a cliff applies at $7,717,500: an estate above roughly 105% of the exclusion loses the benefit of the exclusion entirely and is taxed on the whole estate. A large policy can be exactly what tips an estate over that edge.

Checklist: How an ILIT Removes the Policy

• Create an irrevocable trust under EPTL Article 7 with someone other than you as trustee.
• The trust owns the policy and is the beneficiary, so you no longer hold “incidents of ownership.”
• You gift cash to the trust each year, and the trustee pays the premiums.
• At death, proceeds flow to the trust outside your estate and can be distributed to your family per your instructions.

The Three-Year Rule

If you transfer an existing policy into an ILIT and die within three years, federal law pulls it back into your estate. The clean approach is to have the ILIT apply for and own a new policy from the start. New York follows the federal inclusion concept for these transfers, so timing matters.

Crummey Notices: Don’t Skip Them

To make premium-funding gifts qualify for the annual gift-tax exclusion, the trust beneficiaries generally must receive “Crummey” withdrawal notices each time you contribute. Skipping these letters is one of the most common ILIT maintenance failures. Build a yearly routine: contribute, send notices, keep copies, then pay the premium.

Understand the Trade-Offs

• Irrevocable means irrevocable. Unlike a revocable living trust, you generally cannot undo an ILIT or reclaim the policy.
• You give up control of the policy and the proceeds; the trustee runs it under your trust terms.
• It is for tax and protection, not flexibility. If your estate is comfortably under the New York exclusion, a simpler beneficiary designation may be all you need.

Coordinate With Your Whole Plan

An ILIT should align with your will, any revocable trust, and your beneficiary designations so nothing accidentally routes the death benefit back into your name. For blended families or business owners in New York, the trust terms also control how and when heirs receive the money.

A Note for New York Families

Because the New York estate tax cliff can erase the entire exclusion, ILIT planning rewards getting the details right the first time. A New York estate planning attorney can run the numbers against the 2026 thresholds and draft a trust that actually keeps the policy out of your estate. This article is general information, not legal advice.