A client holds a $1,000,000 life insurance policy on their own life. They want to ensure the proceeds are not included in their gross estate. They transfer the policy to an Irrevocable Life Insurance Trust (ILIT) in Year 1. If the client dies in Year 2, what is the estate tax result?

Assuming the ILIT structure provides immediate protection.

Answer options:

Proceeds are excluded because the ILIT owns the policy.

Proceeds are included in the gross estate under the 3-year rule.

Proceeds are included only to the extent of premiums paid by the client.

Proceeds are excluded because life insurance is never taxable.

How to approach this question

Check the date of transfer vs date of death. If < 3 years, proceeds are pulled back into the estate.

B.Proceeds are included in the gross estate under the 3-year rule.✓ Correct

IRC §2035. If a decedent transfers an interest in a life insurance policy within 3 years of death, the proceeds are included in the gross estate.

Assuming the ILIT structure provides immediate protection.

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