Question:        I am buying an insurance policy on my life that contains a long-term care insurance rider. Can I transfer the policy to an irrevocable insurance trust and still benefit from the long-term care feature?

Answer:          You can benefit from the long-term care feature of a life insurance policy held by an irrevocable life insurance trust (an “ILIT”) you create. Neither the ILIT policy ownership nor you benefitting from this type of policy is an issue. The concern is ensuring you can benefit in a manner that does not defeat the tax benefits you are seeking with an ILIT.

Insured individuals who may be subject to Federal and/or State estate taxes on death often establish ILITs to reduce the size of their estates for tax purposes.  The face value of a policy on an insured’s life is subject to estate tax on the taxpayer’s death.  By transferring the ownership of a policy of insurance to an ILIT, the life insurance policy can be excluded from the insured’s taxable estate upon death.   The cost of achieving this estate tax exclusion is the insured’s inability to hold any control over or so-called incidents of ownership in the policy. When an insured contributes an existing policy on the insured’s life to an ILIT, the policy will be excluded from the insured’s estate if he or she lives more than three years after the date of the policy transfer. Many persons circumvent this three-year lookback when new policies are purchased by having the trust purchase the policy directly as the three-year period will not apply in this case.  

With long-term care benefits appended to a policy of life insurance, the question becomes how an insured can access these benefits when an ILIT, by its express terms, prohibits the insured from receiving any benefits from the trust.  To accomplish this, long-term care benefits can be paid to the ILIT which in turn can distribute the funds to the trust beneficiaries which are then applied to the insured’s medical expenses.  So long as the insured does not receive distributions from the trust and the ILIT trustee is not obligated to pay the insured’s medical expenses, directly or indirectly, the policy held by the ILIT will not be includable in the insured’s estate for estate tax purposes.

An individual’s spouse, children and other persons are typically the beneficiaries of the insured’s ILIT.  One additional concern is avoiding gift tax consequences upon the payment of the insured’s medical benefits by one or more of the ILIT beneficiaries.  Gratuitous transfers in excess of certain thresholds can create a gift tax liability . Where the ILIT pays the long-term care benefits it receives to the insured’s spouse who in turn pays the insured’s medical expenses, the payments by the spouse will not be taxable gifts since an unlimited gift tax exclusion applies for gratuitous transfers between spouses.  For non-spouse beneficiaries, there is a $15,000 per year, per beneficiary exclusion for taxable gifts. However, there is also a general gift tax exclusion for all persons for gratuitous transfers for medical purposes.  When an ILIT distributes the long-term care benefits it receives from the insurance company to the ILIT beneficiaries, whether a spouse or another, the recipient can in turn pay the medical care provider, thereby avoiding any potential gift tax consequences.

Increased longevity and a concomitant increase in medical expenses have generated increased interest in long-term care insurance policies. Standalone long-term care insurance policies have also  become increasingly expensive over the years. With new insurance products combining death benefits in a conventional life insurance policy with long-term care benefits, there is a desire to achieve both estate tax savings with an ILIT without the insured forfeiting continued access to long-term care benefits.  A properly structured arrangement will enable you to maintain your policy in an ILIT without surrendering your entitlement to long-term care insurance benefits.


The Tax Corner addresses various tax, estate, asset protection and other business matters.  Should you have any questions regarding the subject matter or if you have questions you want answered, you may contact Bruce at (312) 648-2300 or send an e-mail to