Life Insurance Could Push Your Estate Over the Edge—Unless You Use an ILIT
Life insurance is supposed to provide peace of mind. But if you live in Oregon and own your policy outright, that “tax-free benefit” could quietly tip your estate over the $1 million threshold and cost your heirs thousands in estate taxes.
Let’s walk through the problem—and the fix.
The Oregon Estate Tax Surprise
Here’s what most people get right: life insurance proceeds are not subject to income tax for your beneficiaries. That’s true. But estate tax is a different story.
If you own your policy, the death benefit is included in your taxable estate. In Oregon, with an estate tax exemption of just $1 million, that inclusion can create an unexpected—and avoidable—tax hit.
For example, let’s say you have:
A $750,000 life insurance policy
A house worth $500,000
Retirement savings and other assets worth another $250,000
That adds up to $1.5 million. Without planning, Oregon taxes everything over the $1 million exemption. That means your heirs could owe tens of thousands—despite your best intentions.
The ILIT: Your Estate Plan’s Pressure Valve
The fix is something called an Irrevocable Life Insurance Trust, or ILIT.
An ILIT is designed to own your life insurance policy—so the proceeds don’t count toward your taxable estate. Here’s how it works:
You create the trust. It must be irrevocable. You can’t dissolve it or reclaim the assets later.
You name someone else as trustee. A family member, friend, or advisor.
The trust becomes the policy owner. Either by buying a new policy or accepting a transfer of an existing one.
You make annual gifts to the trust. The trustee uses those gifts to pay the premiums.
Simple in concept—but there’s a technical wrinkle when it comes to gift tax.
Crummey Powers: The Gift Tax Workaround
In 2025, you can give up to $19,000 per person per year without triggering federal gift tax. But there’s a catch: to qualify for this annual exclusion, the gift must be a “present interest”—meaning the recipient has immediate access to the funds.
A gift to a trust doesn’t automatically qualify, because the beneficiary typically can’t use the money right away.
Enter the Crummey power.
With a Crummey power, each trust beneficiary gets a short-term right to withdraw the contribution (usually 30 days). They receive a formal notice: “You may withdraw $18,000 from the trust.”
They don’t, of course. But that limited withdrawal right is enough to make the gift count as a present interest—qualifying it for the annual exclusion. No gift tax. No use of your federal lifetime exemption. Just clean, tax-efficient funding of the trust.
And yes, Crummey was a real person—Clifford Crummey sued the IRS and won in the 1960s. His name now lives on in tax strategy lore.
Oregon-Specific Note
Oregon does not have a gift tax. So if your estate won’t come close to the federal estate tax exemption (currently $14 million per person), you can make gifts to the ILIT without worrying about Crummey notices or annual exclusion rules. Still, it’s best to plan carefully, especially if you’re also concerned about federal exposure.
What You’ve Built
If you follow this structure, you now have:
A trust that owns your life insurance policy
Premiums paid using tax-free gifts
A death benefit that avoids Oregon estate tax
Trustee-controlled distributions that follow your terms
That’s a powerful planning tool. And it could mean hundreds of thousands of dollars staying with your family instead of going to the Department of Revenue.
A Few Warnings
The three-year rule: If you transfer an existing policy into the ILIT and die within three years, the IRS pulls the death benefit back into your estate. That’s why ILITs work best when established before the policy is issued.
Loss of control: Once the policy is in the trust, you can’t change beneficiaries or borrow against it. The trust owns it—permanently.
Still, for Oregon families with moderate to large estates, an ILIT can be the key to keeping your plan intact and your heirs protected from unnecessary taxes.
Final Thought
Life insurance is a tool, not a plan. Without the right structure, it can create as many tax problems as it solves. But with an ILIT, you can keep that policy working for your family—not against them.
The companion blog post for this episode is right here. If you or someone you know has a large policy and no idea what an ILIT is, it’s time to talk.
At Track Town Law, I offer flat-fee estate planning that covers everything from ILIT design to Oregon tax strategy. If you want to make sure your insurance isn’t working against your estate plan, book a free consultation here.
