Here is a detail that surprises most people about America’s wealthiest families: they carry enormous amounts of life insurance, and almost none of them own their own policies. The policy on the patriarch of a billion-dollar real estate family is typically owned by a trust he does not control and, on paper, gets nothing from. That is not an accident. It is the whole strategy.
The vehicle is the irrevocable life insurance trust, or ILIT — one of the oldest and most reliable tools in the dynastic playbook, and one that scales down remarkably well to New York families who simply own a home, a business, or enough life insurance to matter.
Key takeaways
- Life insurance proceeds are income-tax-free, but if you own your own policy, the death benefit is counted in your taxable estate — which can push a New York family over the estate tax threshold.
- An ILIT owns the policy instead, so the proceeds land outside your estate: tax-free cash your family can use to pay estate taxes, buy out business partners, or equalize inheritances.
- Crummey notices — short letters giving beneficiaries a brief window to withdraw contributions — are what let you fund the premiums with tax-free annual-exclusion gifts.
- Transferring an existing policy into an ILIT starts a three-year clock; if the insured dies within it, the proceeds come back into the estate, so earlier is better.
Why the wealthy rarely own their own policies
Most people assume life insurance is simply tax-free. That is only half right. The death benefit generally escapes income tax, but if you hold what the tax law calls “incidents of ownership” — you own the policy, can change beneficiaries, or can borrow against it — the entire payout is added to your taxable estate when you die. A policy meant to protect your family can quietly become the asset that triggers estate tax, especially in New York, where the state exemption is far lower than the federal one and comes with its own cliff. Wealthy families solved this long ago: the insured person does not own the policy. A trust does. The insured merely supplies the premium money, indirectly, in a carefully documented way.
How an ILIT actually works
The mechanics are straightforward once you see them laid out. Your attorney drafts an irrevocable trust and someone other than you — often an adult child, a sibling, or a professional — serves as trustee. The trust then applies for and owns the life insurance policy on your life, and the trust itself is the beneficiary. Each year, you gift cash to the trust; the trustee uses it to pay the premium. When you die, the insurer pays the trust, and because you never owned the policy, the proceeds are outside your estate for both federal and New York purposes. The trust document then controls what happens next: hold funds for a surviving spouse, distribute to children in stages, or keep the money in trust for decades, generally protected from beneficiaries’ creditors and divorces. Done as part of a coordinated estate plan, the ILIT effectively converts modest annual premiums into a large, tax-free pool that arrives exactly when the family needs cash most.
Crummey notices, in plain English
The odd-sounding paperwork that makes ILITs work is the Crummey notice, named after the family that won the tax case creating it. The problem it solves: gifts qualify for the annual gift tax exclusion only if the recipient gets a “present interest” — something they can use now. A gift locked inside an irrevocable trust normally fails that test. The fix is elegant. Each time you contribute premium money, the trustee sends beneficiaries a short letter saying they may withdraw their share for a limited period, often thirty days. Beneficiaries rarely withdraw, but the right must be real and unrestricted, and it is that right that transforms the contribution into a present-interest gift that, up to the annual exclusion per beneficiary, uses no lifetime exemption. The letters must genuinely go out and be kept on file; sloppy Crummey practice is a common way ILITs fail an audit, which is why families have counsel manage the routine.
What the proceeds are really for: liquidity on demand
Estate tax has a brutal feature: it is due in cash, on a deadline, often while the estate’s value is tied up in a building, a business, or a portfolio nobody wants to sell under pressure. Dynastic families use ILIT proceeds as instant liquidity — the trust can buy assets from the estate or lend it money, giving the executor cash to pay taxes without a fire sale. Business owners use the same move to fund buy-sell agreements, so surviving partners can buy out a deceased owner’s share, and to equalize inheritances when one child gets the company and the others get cash. For a Brooklyn family whose wealth is a two-family house, a small business, and a policy through work, a scaled-down ILIT paired with business succession planning accomplishes the very same thing at one-thousandth the size.
How Schwartsman Law Group can help
Schwartsman Law Group designs ILITs for New York families and business owners — drafting the trust, coordinating the policy ownership and beneficiary designations, and setting up the annual Crummey notice routine so the structure holds up. Founding attorney Marianna Schwartsman and her team advise clients from offices in Brooklyn, Manhattan, and Manhasset, and serve families in English, Spanish, and Russian. This guide is general information, not legal advice — the right structure depends on your assets, your family, and your goals. Call +1 212 518 3868, email ms@schwartsmanlaw.com, or request a free consultation to have it designed and set up properly.