What happens if the insured dies within three years of transferring a policy to an ILIT?
Key takeaway
Transferring an existing life insurance policy to an irrevocable life insurance trust can leave the death benefit included in the insured's gross estate if the insured dies within three years of the transfer. This explanation covers the federal estate treatment of an existing policy for owners of businesses, real estate and private investments, and their families. The transfer and the insured's death within that period are the central conditions.
How the three-year rule applies
IRC Section 2035 generally includes the death benefit in the gross estate when the insured transfers an existing policy to an irrevocable life insurance trust and dies within three years. Practitioner descriptions identify the transfer of an existing policy as the event that begins the period.
The rule described here concerns an existing policy transferred to the trust. The stated condition is the insured's death within three years after that transfer.
What may be included in the estate
The death benefit may be included in the insured's estate for transfer tax purposes when an existing policy is transferred to a trust and the insured dies within three years. The gross estate treatment is described for the proceeds of that policy.
Which transfers the descriptions cover
The three-year issue concerns an existing insurance policy transferred to an irrevocable life insurance trust. Practitioners describe that transfer as a taxable gift and states that proceeds are included in the grantor's estate if death occurs within three years.
A practitioner account says the three-year issue follows a transfer of an existing policy, while other accounts describe the resulting estate inclusion for the policy proceeds.
How the outcome is characterized
The estate inclusion is described as a possible or general result of death within three years after an existing policy transfer. The accounts use the gross estate or estate for transfer tax purposes to describe that treatment.
For an existing policy, the central point is the relationship between the transfer and the insured's death within three years.
