Insurance Curator High-net-worth (HNW) clients in New York, Florida, California, and other U.S. jurisdictions regularly face a critical decision: should life insurance be owned personally (or by an LLC) or held in a trust (most commonly an Irrevocable Life Insurance Trust — ILIT)? The answer drives estate tax exposure, creditor protection, premium funding mechanics, trustee duties, and ultimate control over proceeds. This article gives practical, tax-aware guidance for advisors and wealthy owners evaluating ownership options in the U.S. market.
Executive summary
- Hold in trust (e.g., ILIT) when minimizing estate inclusion, shielding proceeds from beneficiaries’ creditors, and imposing distribution controls matter. Best for those with estates near or above the federal exemption ($13.61M per individual in 2024) or with state estate tax exposure (e.g., New York).
- Personal ownership can be appropriate when you need flexible control, expect to borrow/pledge the policy, or when estate tax exposure is low. Personal ownership is simpler and often less expensive administratively.
- PPLI or private-wrapper structures suit ultra-HNW taxpayers seeking tax-efficient investment inside a life wrapper, but they carry sizable minimums and platform fees.
(See the IRS estate tax rules for baseline thresholds: https://www.irs.gov/businesses/small-businesses-self-employed/estate-tax.)
Key legal and tax principles that drive the decision
Estate tax inclusion
- If the insured owns the policy at death, or retained incidents of ownership (power to change beneficiary, revoke, borrow), the policy death benefit is includible in the insured’s gross estate under IRC §2042.
- The federal estate tax exemption was $13.61 million per person in 2024; amounts above that may face the federal rate up to 40%. State estate tax rules can be more restrictive (e.g., New York’s exemption is substantially lower than the federal level), so state residence matters.
The 3-year transfer rule
- Gifts of an existing policy or transfers to a trust within 3 years of death can still cause inclusion under the IRC §2035 “3-year rule.” To avoid that, transfers (or trust funding strategies involving existing policies) should occur more than three years before the insured’s death.
Creditor protection
- Properly drafted irrevocable trusts commonly shield death proceeds from the insured’s creditors and — depending on state law and trust terms — beneficiaries’ creditors. In contrast, proceeds paid to a personally owned policy may be reachable by creditors of the owner or beneficiary in some scenarios.
- State law variability: Some states have stronger protection for life insurance cash value (e.g., Florida statutes), but ILITs provide more predictable multistate protection.
Control and flexibility
- Personal ownership gives the insured immediate flexibility: ability to change beneficiaries, exercise policy loans, or surrender the policy.
- Trust ownership delegates control to a trustee and can impose distribution limits (e.g., spendthrift provisions, staggered distributions, or liquidity-triggered distributions). That’s valuable for family governance and for preserving benefits for special needs or younger beneficiaries.
Practical funding and gifting mechanics
- For ILITs, premiums are typically funded by annual gifts to the trust using Crummey powers to qualify for the annual gift tax exclusion (currently $17,000 per donee in 2024) or via larger taxable gifts or exemptions.
- For high-premium strategies (e.g., paying dozens or hundreds of thousands of dollars per year), consider pairing the ILIT with a life insurance product designed for wealthy buyers (see PPLI below).
- Be mindful of transfer-for-value rules that can affect income tax treatment if ownership is later sold or transferred.
Products and market realities: term, permanent, and PPLI
- Term life is inexpensive for limited-duration liquidity needs and is often personally owned for estate liquidity planning when estate tax exposure is low.
- Permanent products (UL, IUL, whole life) are typical inside ILITs when long-term estate liquidity and wealth transfer are primary goals.
- Private Placement Life Insurance (PPLI) is a common HNW tool: it combines a life wrapper with bespoke investment sub-accounts. Typical features:
- Minimums: often in the $1M–$5M+ range (suitable for high-net-worth clients).
- Fee structure: platform fees and manager fees (commonly 0.5%–2%+ on assets), plus insurer mortality/expense charges.
- Providers in the market include boutique PPLI platforms and insurers that support private placement offerings. For an overview, see Investopedia’s PPLI discussion: https://www.investopedia.com/terms/p/private-placement-life-insurance-ppli.asp.
Pricing examples (approximate ranges as of 2024; actual quotes vary by age, underwriting, product, and health):
- Term (sample ranges for a healthy non-smoker purchasing $1M):
- Age 35, 20-year term: roughly $200–$500/year
- Age 50, 20-year term: roughly $600–$2,000/year
- Source: Policygenius life insurance pricing overviews and market data — https://www.policygenius.com/life-insurance/how-much-does-life-insurance-cost/
- Permanent & PPLI: premiums are highly individualized. Expect annual premium budgets for significant death benefits often in the tens of thousands to millions of dollars. PPLI minimum single-premium investments typically start at $1–$5 million.
Comparison: Trust ownership vs Personal ownership
| Factor | Trust ownership (ILIT/irrevocable) | Personal ownership |
|---|---|---|
| Estate tax inclusion | Generally avoids inclusion if properly structured and outside 3‑year rule | Included if owner or retained incidents exist |
| Creditor protection | Stronger for beneficiaries and multistate exposure when irrevocable | Limited; depends on state law and beneficiary’s creditor situation |
| Control | Trustee control; limited insured control after transfer | Owner retains full control over policy features and beneficiary |
| Premium funding complexity | Requires gift/Crummey funding or other funding—administrative costs | Simpler: owner pays premiums directly |
| Administrative costs | Trustee fees, trust drafting, annual compliance | Lower ongoing costs; insurer premiums only |
| Transfer-for-value risk | Generally manageable if trust is structured correctly | Selling/assigning policy can trigger adverse income tax rules |
| Suitability | Estates near/above federal or state exemption; multigenerational plans | Smaller estates, short-term liquidity needs, desire for control |
Trustee duties and practical administration
Trust ownership adds fiduciary duties: premium payment monitoring, record-keeping, trust tax reporting, and beneficiary communications. Coordinating trust distribution rules with insurance payout timing is essential — misalignment can create liquidity shortfalls or unintended access to funds. For detailed trustee and funding guidance see: Trust Administration and Insurance: Trustee Duties, Reporting, and Premium Funding Paths.
When each approach typically makes sense (by location examples)
- New York (higher state estate tax exposure): Favor ILITs or other trust ownership when estate approaches New York exemption levels. A $25M family estate in Manhattan should seriously consider ILIT + PPLI or permanent coverage for federal/state planning.
- Florida (no state income or estate tax): Residents often optimize between personal ownership and ILITs depending on creditor exposure and desired beneficiary protection; Florida homestead protections do not substitute for ILIT benefits.
- California (no state estate tax): ILITs remain valuable for multigenerational control and creditor protection, even absent state estate tax.
Common pitfalls and how advisors avoid them
- Failing to observe the 3‑year rule when transferring existing policies.
- Funding ILIT premiums informally (without Crummey notices or trustee control) leading to gift tax or constructive ownership problems.
- Ignoring state law variations on creditor protection.
- Selecting an insurer/product without clear premium affordability stress-testing (simulate premiums for 10–30 years).
For deeper tactical integrations and advanced techniques, see:
- Policy Ownership and Trust Funding: Avoiding Estate Inclusion and Transfer-for-Value Traps
- Integrating Life Insurance with Revocable and Irrevocable Trusts for HNW Estate Plans
- Designing Layered Trust Structures with Insurance for Multigenerational Wealth Transfer
Action checklist for advisors and trustees
- Determine federal and state estate tax exposure (use current IRS guidance: https://www.irs.gov/businesses/small-businesses-self-employed/estate-tax).
- Decide on objectives: tax mitigation, creditor protection, control, or liquidity.
- Run premium affordability modeling for the client’s anticipated health and age.
- If choosing trust ownership: draft ILITs with Crummey powers, coordinate funding, and document trustee authorities.
- If choosing PPLI: confirm minimum single-premium thresholds, platform fees, and suitability for investment objectives (see PPLI overview: https://www.investopedia.com/terms/p/private-placement-life-insurance-ppli.asp).
- Revisit ownership decisions at life events: residency changes (NY ↔ FL), material estate-value changes, or major tax-law changes.
Conclusion: For HNW clients in the U.S., trust ownership (ILIT/PPLI wrappers) is often the preferred path when estate taxes, creditor protection, and multigenerational control are priorities. Personal ownership remains appropriate for clients prioritizing control and simplicity or with limited estate tax exposure. Work with estate counsel, life insurance specialists, and fiduciaries to align ownership choice with the family’s tax, legal, and governance goals.