Brooklyn homeowners are often surprised to learn that life insurance can push an estate into taxable territory. The irrevocable life insurance trust, or ILIT, is the classic fix. Here are the questions clients ask most.
Isn’t life insurance tax-free already?
The death benefit is generally income-tax-free to your beneficiaries, but that is a different question from estate tax. If you own the policy when you die, the full death benefit is counted in your taxable estate. For 2026, New York’s estate tax exclusion is $7,350,000, and crossing the cliff at $7,717,500 makes the entire estate taxable—not just the overage. A long-held Brooklyn brownstone plus a $1 million policy can quietly cross that line.
How does an ILIT solve that?
An ILIT is an irrevocable trust (governed by EPTL Article 7) that owns the policy instead of you. Because you no longer own or control it, the proceeds sit outside your taxable estate. When you pass, the trust collects the death benefit and distributes it to your beneficiaries according to your instructions—free of estate tax and outside the Kings County Surrogate’s Court probate process.
What does “irrevocable” really mean here?
It means you give up control. You cannot be the trustee in the usual sense, you cannot freely change the terms, and you cannot borrow against the policy. That loss of control is precisely what removes the proceeds from your estate. For Brooklyn families weighing this, the trade-off is real and worth discussing carefully before committing.
Can I move my existing policy into an ILIT?
Yes, but timing matters. Under the federal three-year rule, if you transfer an existing policy into an ILIT and die within three years, the proceeds are pulled back into your taxable estate. For that reason, many advisors have the ILIT purchase a brand-new policy from the start, avoiding the look-back entirely. This is separate from the five-year Medicaid look-back that applies to irrevocable trusts used for asset protection—two different timelines that confuse many people.
How do premiums get paid?
You typically gift money to the trust each year, and the trustee pays the premium. To keep those gifts within the annual gift-tax exclusion, the trust uses “Crummey” notices giving beneficiaries a brief window to withdraw. It sounds technical, and it is—done wrong, the gifts can lose their exclusion. This is one area where Brooklyn families should not improvise with a form.
Who is an ILIT actually for?
If your total estate—home equity, retirement accounts, and life insurance—sits comfortably under the New York exclusion, you may not need one. ILITs shine for owners of appreciated Brooklyn real estate and sizable policies who are near or above the cliff, or who want proceeds managed for young children rather than handed over outright.
The takeaway
An ILIT can keep a large death benefit out of your taxable New York estate and out of probate, but it demands real planning around control, timing, and premium gifting.
This article is general information, not legal advice. ILIT planning is highly individual—consult a qualified New York attorney before creating one.
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