Ohio Irrevocable Life Insurance Trusts (ILIT) Lawyer

Irrevocable Life Insurance Trusts in Ohio: Removing Life Insurance from Your Taxable Estate

Many Ohio families are surprised to learn that life insurance death benefits are generally included in the insured\'s federal taxable estate under IRC 2042 if the insured held any "incidents of ownership" in the policy at death. For a business owner or professional with $2–3 million in term or permanent life insurance, this can push an otherwise non-taxable estate over the federal exemption threshold — resulting in a significant and avoidable estate tax bill. An Irrevocable Life Insurance Trust (ILIT) solves this problem by shifting ownership of the policy from you to the trust, removing the death benefit from your estate while keeping the proceeds available to support your family or fund your estate\'s liquidity needs. Jwayyed Law LLC helps clients throughout Columbus, Cincinnati, Dayton, and surrounding Ohio communities design and administer ILITs as part of a comprehensive estate plan.

Ohio does not impose a state estate tax (it was repealed effective January 1, 2013), so ILIT planning is exclusively a federal estate tax strategy for Ohio residents. The federal estate tax exemption is $13.61 million per individual in 2024, but this exemption is scheduled to sunset after December 31, 2025, to approximately $7 million (adjusted for inflation) absent congressional action. For Ohio families with significant life insurance, business interests, or investment portfolios, now is the time to evaluate ILIT planning while the exemption is at its historic high.

Under IRC 2042, life insurance proceeds are included in the insured\'s gross estate if (1) the proceeds are payable to the insured\'s estate or executor, or (2) the insured possessed any incidents of ownership in the policy at death. Incidents of ownership include the right to change beneficiaries, to borrow against the policy\'s cash value, to cancel or surrender the policy, or to assign the policy. This is an extremely broad definition — even holding the policy in a revocable living trust does not remove it from your estate because you remain the trust owner with the ability to revoke.

How Crummey Powers Make the ILIT Work

An ILIT is irrevocable and the trust itself owns the policy. To keep the policy in force, someone must pay the premiums. Typically, you (as the grantor) make annual gifts to the trust in an amount equal to the premium. The challenge is that gifts to a trust are treated as gifts of a future interest — they do not qualify for the annual gift tax exclusion of $18,000 per beneficiary (2024 amount, indexed for inflation) unless the beneficiaries have the present right to demand the gifted funds.

Crummey powers solve this problem. Each time you make a premium gift to the trust, the trustee sends formal written notices — Crummey notices — to each trust beneficiary, informing them that they have the right to withdraw their proportionate share of the contribution within a defined window (typically 30 days). Because beneficiaries have this present-right demand power, the contribution qualifies as a present-interest gift and uses your annual exclusion. In practice, beneficiaries almost never exercise the right to withdraw because doing so would reduce the trust assets and ultimately their inheritance — but the right must be genuine, the notices must be real, and the 30-day window must actually be available. The IRS scrutinizes ILIT Crummey notices carefully, and failure to follow through can cause the premium gifts to be treated as taxable gifts that use your lifetime exemption.

If you have multiple beneficiaries, each one\'s annual exclusion can be leveraged. A couple with three adult children as ILIT beneficiaries can contribute up to $54,000 per year (three children × $18,000) free of gift tax using their annual exclusions. This allows substantial premium funding without eating into the lifetime exemption, making the ILIT an especially efficient vehicle for high-face-value permanent life insurance policies.

Transferring an Existing Policy vs. Trust-Purchased Policy: The Three-Year Rule

The most elegant way to use an ILIT is to have the trust purchase a new policy directly from the insurer from the outset. Because the trust was always the owner and applicant, you never held incidents of ownership and the three-year rule of IRC 2035 does not apply. If you die the next day, the death benefit is still excluded from your estate.

If you already own a life insurance policy and want to transfer it to an ILIT, IRC 2035 creates a three-year lookback. If you die within three years of transferring the policy to the trust, the full death benefit is pulled back into your taxable estate as if the transfer never happened. The three-year rule applies only to life insurance transfers (and a few other transfers specifically included in the estate tax); it does not apply to transfers of most other assets. Despite this risk, the potential long-term estate tax savings often justify the transfer — particularly for younger, healthier insureds who are likely to survive the three-year period. For very ill or elderly clients, having the trust purchase a new policy (if insurable) is the safer approach.

Second-to-die (survivorship) life insurance policies — which pay out upon the death of the second of two insureds, typically spouses — are particularly well-suited for ILITs. Estate tax is generally deferred until the second spouse dies (due to the unlimited marital deduction), so the policy payout aligns with when the estate tax bill comes due. Second-to-die policies are also less expensive than single-life policies of equivalent face value. When the survivor dies, the ILIT receives the death benefit free of estate tax and can use the proceeds to purchase illiquid assets from the estate (such as real estate or a closely held business interest) at fair market value, providing estate liquidity without a forced sale.

Using ILIT Proceeds to Fund Estate Taxes and Purchase Estate Assets

One of the most powerful uses of ILIT proceeds is estate liquidity planning. If your estate consists largely of illiquid assets — a family farm in central Ohio, a closely held manufacturing business in Columbus, or investment real estate — your heirs may be forced to sell those assets at a discount to pay estate taxes within nine months of your death. An ILIT provides a pool of liquid funds that the trustee can use to purchase those illiquid assets from your estate at fair market value or to loan funds to your estate. The ILIT itself is not part of your estate, so these proceeds are available tax-free to address the tax bill without a forced liquidation.

Properly establishing and administering an ILIT requires careful attention to the Ohio Trust Code under ORC Chapter 5801, the IRC 2042 incidents-of-ownership rules, IRC 2035's three-year rule, and the Crummey notice requirements. Our Columbus estate planning attorneys at Jwayyed Law LLC draft the trust document, prepare the annual Crummey notice templates, and advise your trustee on ongoing administration so that the ILIT delivers the estate tax benefits it was designed to provide. Call us at (614) 285-5482 to get started.

Irrevocable Life Insurance Trusts – Locations We Serve

We serve clients in the following Ohio counties. Each county has its own page; click through for court information and local details.