5 Reasons to Purchase Life Insurance Within a Trust When Creating an Estate Plan in New York

Eugene Strupinsky • May 29, 2025

Life insurance can be one of the most strategic tools in an estate plan, especially when it's purchased and held within a properly structured trust. In a high-tax state like New York, where estate taxes can significantly reduce the assets your heirs receive, integrating life insurance through a trust—most commonly an Irrevocable Life Insurance Trust (ILIT)—can help preserve your legacy, ensure liquidity, and avoid unnecessary tax burdens.



Here are five key reasons to consider purchasing life insurance within a trust as part of your estate planning strategy in New York:


1. Shielding Life Insurance Proceeds from New York Estate Taxes

In New York, estates that exceed the state's basic exclusion amount—$6.94 million in 2024—may be subject to a significant estate tax. Due to the state's unique "estate tax cliff," if your estate exceeds the exemption by more than 5% (i.e., more than $7,287,000), the entire estate becomes taxable, not just the amount over the threshold. This can result in a substantial and unexpected tax liability for your heirs.

By purchasing a life insurance policy directly through an Irrevocable Life Insurance Trust (ILIT), the policy proceeds are excluded from your taxable estate—as long as the trust is properly structured from the outset. This strategy also avoids the IRS's three-year lookback rule, which applies when an existing policy is transferred into a trust. Purchasing the policy within the trust ensures full estate tax protection and maximizes the benefit for your beneficiaries.


2. Immediate Liquidity Without Forcing Asset Sales

Life insurance proceeds can provide critical liquidity to your heirs—used to pay estate taxes, settle debts, or maintain lifestyle—without forcing them to sell illiquid assets like real estate or a family business.

By purchasing the policy within a trust, the trust—not your estate—owns the policy, so the death benefit bypasses probate and becomes available relatively quickly for the trustee to distribute according to your wishes.


3. Protecting and Managing Inheritance for Children and Dependents

Placing a policy inside a trust allows you to control how and when your beneficiaries receive the proceeds. This is particularly valuable if your heirs are minors, have special needs, or may not be financially mature.

In New York, where the cost of living and education is high, structuring life insurance within a trust can ensure long-term financial stability for your dependents—free from mismanagement, creditors, or unplanned tax hits.


4. Avoiding the IRS "Three-Year Rule"

If you transfer an existing life insurance policy into a trust, the IRS imposes a "three-year rule" under IRC §2035. If you pass away within three years of the transfer, the policy's death benefit may still be counted as part of your taxable estate.

To avoid this, you can have the ILIT apply for and purchase a new life insurance policy from the outset. This ensures the policy is never part of your estate and sidesteps the lookback rule entirely—a crucial consideration for those aiming to reduce estate taxes in New York.


5. Supporting Business Succession or Special Family Planning Goals

For business owners or families with complex dynamics, life insurance owned by a trust can fund buy-sell agreements, equalize inheritances among children, or protect against liquidity shortfalls. Because the trust owns the policy, it ensures the funds are used specifically for these goals—and not tied up in probate or estate tax proceedings.


How Khalifeh & Strupinsky, P.C. Can Help

At Khalifeh & Strupinsky, P.C., we specialize in New York estate planning with a deep understanding of how life insurance and trusts intersect. Whether you're establishing an ILIT, navigating the New York estate tax cliff, or selecting the right type of life insurance for your goals, our attorneys can help you build a plan that preserves wealth across generations.


Get in Touch With Our New York Estate Planning Team

Ready to protect your legacy with a trust-owned life insurance strategy? Our experienced estate planning attorneys at Khalifeh & Strupinsky, P.C. are here to help. Call us today at 917-717-5007 or fill out our online form to schedule a consultation.




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