Life Insurance and Estate Tax: Why Ownership Decides Everything
Written and reviewed by Hans Goldstein, licensed insurance producer, NPN 20602398 · CA Insurance License #4273294Last reviewed · Published October 3, 2026
The incidents-of-ownership test
Proceeds are included in your gross estate if they are payable to your estate, or if at death you held any incident of ownership: the right to change the beneficiary, surrender or cancel, borrow against it, assign it, or a reversionary interest over 5% of the policy's value (IRC 2042). It does not matter who paid the premiums.
AI voices. Education, not tax or legal advice. Hans is paid a commission if you buy a policy through him. Comment ILIT on the video for the checklist.
Three ownership setups
Who owns the policy decides the estate tax
| Owner | In your estate? | Notes |
|---|---|---|
| You (insured) | Yes, the full death benefit | Simple; can push an estate over the exemption |
| Your spouse | Not at your death; often in your spouse's estate at theirs | Works only if your spouse survives; the marital deduction then defers |
| An ILIT | No, if set up and funded correctly | Irrevocable; Crummey notices; you cannot be trustee |
Is an ILIT worth a conversation?
Send your email and I'll send the estate-tax worksheet and a policy design read within one business day.
We’ll email it to you. Hans Goldstein · NPN 20602398.
Rather talk it through? Or book 15 minutes on Hans’s calendar.
How a policy can raise the bill
Hypothetical single person, 2026 (simplified)
| Without the policy in the estate | With a $5M policy owned by you | |
|---|---|---|
| Taxable estate (single, 2026) | $20,000,000 | $25,000,000 |
| Exemption | $15,000,000 | $15,000,000 |
| Taxed at 40% | $5,000,000 | $10,000,000 |
| Federal estate tax (approximate) | $2,000,000 | $4,000,000 |
Hypothetical. Not an illustration of any specific policy. Not a quote. Simplified flat 40% on the excess; actual computation uses graduated brackets and credits.
The same $5,000,000 policy owned by an ILIT would leave the tax at about $2,000,000 and deliver the full $5,000,000 to the trust to help pay it.
Moving ownership
Giving an existing policy to an ILIT starts a 3-year clock under IRC 2035 (the 3-year rule). A new policy applied for by the trustee avoids it. Income tax is separate: when life insurance is taxable.
Projected over the exemption, or own property in an estate-tax state?
Send a net worth range and your state. Within one business day you get a plain-English read on whether an ILIT is worth discussing with your attorney, and the policy design that would fit.
Rather talk it through? Or book 15 minutes on Hans’s calendar, or call 213-414-2808.
Hans Goldstein · 213-414-2808 · NPN 20602398, independent licensed insurance producer
Frequently asked questions
Sources
- 26 U.S.C. §2042 (life insurance proceeds in the estate), Cornell LII
- 26 U.S.C. §2035 (transfers within 3 years of death), Cornell LII
- 26 U.S.C. §2001 (estate tax rate), Cornell LII
- Rev. Proc. 2025-32 sets the 2026 annual gift exclusion at $19,000 (sec. 4.42) and the basic exclusion amount at $15,000,000 (sec. 4.14, per OBBBA). The GST exemption is also $15,000,000. The noncitizen spouse annual exclusion is $194,000 (as of 2026-01-01)
- 26 U.S.C. §101 (death benefits, accelerated benefits), Cornell LII
Hans Goldstein, CA Insurance License #4273294 · NPN 20602398 · Goldstein & Co. LLC dba Goldstein Insurance Services, CA License #6016830
Contact: hans@hansgoldstein.com · 213-414-2808
General education, not tax or legal advice. Tax treatment depends on your facts and on current law, which can change. Talk to your CPA or estate attorney. Guarantees are backed by the financial strength and claims-paying ability of the issuing insurance company. Guarantees apply only to the contractual terms of the policy. Caps, participation rates, loan rates, charges and dividends are not guaranteed and can change. Hans is not an attorney. An ILIT is drafted by your estate attorney; coordinate premium gifts and Form 709 filings with your CPA. Hans is paid a commission by the insurer if you buy a policy through him. For life insurance, ask and he will tell you what he earns on your specific policy. Product and company names are trademarks of their owners. Goldstein Insurance Services is an independent agency, not affiliated with or endorsed by any insurer named here. Life insurance requires underwriting; not everyone qualifies. This page describes products in general terms; read the policy and the insurer's disclosures before you buy.