Most Long Island families assume life insurance is tax-free, and for income tax purposes it usually is. For New York estate tax, the story changes: a policy you own is counted in your estate. An Irrevocable Life Insurance Trust, or ILIT, is the tool that keeps those proceeds out of the count. Here is how it works, what it costs, and when it earns its keep.
Why Life Insurance Triggers Estate Tax
If you own your life insurance policy or hold any incidents of ownership, the full death benefit is included in your taxable estate. New York’s 2026 estate tax exclusion is $7,350,000, with a cliff at $7,717,500. Cross that cliff and the entire estate becomes taxable, not just the amount over the threshold. On Long Island, where a paid-off home in Manhasset or Bay Shore plus retirement accounts can already approach the exclusion, a $1 million or $2 million policy is often the very thing that pushes an estate over the cliff.
How an ILIT Works
An ILIT is an irrevocable trust under EPTL Article 7 that owns the policy instead of you. Because you do not own it and cannot change it, the proceeds are not in your taxable estate. The trustee, someone other than you, holds the policy, pays the premiums from gifts you make to the trust, and after your death distributes the proceeds to your beneficiaries according to the trust terms, often with protections from creditors, divorce, or spendthrift heirs.
Cost, Timeline, and the Mechanics
Setting up an ILIT involves drafting the trust, applying for a new policy in the trust’s name, or transferring an existing one, and arranging premium funding. Drafting typically takes a few weeks. Two mechanics matter. First, if you transfer an existing policy, a three-year look-back applies, so the policy must survive three years from transfer to escape your estate; a newly issued policy owned by the trust from day one avoids that wait. Second, premium gifts are usually structured with Crummey notices to beneficiaries so the gifts qualify for the annual gift tax exclusion.
Is an ILIT Worth It for You
An ILIT is irrevocable, so it is not the right tool for everyone. It shines when your estate, including insurance, is near or above the New York exclusion, when you want to provide liquidity to pay estate taxes without forcing a sale of the family home, or when you want controlled, protected distributions to heirs. For estates comfortably below the exclusion, a simpler plan often suffices.
A Note for Long Island Readers
ILITs are powerful but unforgiving once signed. Before transferring a policy or funding a trust, consult a licensed New York estate planning attorney who handles Nassau and Suffolk County estates and can confirm whether an ILIT fits your numbers and the current estate tax thresholds.
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