The Power of ILITs: Protecting Liquidity and Preserving Legacy in the $30 Million Exemption Era

For ultra-high-net-worth families, the estate tax is rarely a “surprise”—but it can still be a disruptive force. With the permanent $15M per person exemption now in place (about $30M for a married couple, indexed for inflation), many families assume that if they’re under that threshold, they’re safe.

However, if your estate is close to, at, or above that $30M threshold, the math is straightforward: every dollar above the exemption can be subject to a 40% federal estate tax. That means a $10M overage could trigger a $4M tax bill.

The challenge? Those taxes are due in cash within nine months of death—and for estates with illiquid assets like private businesses, real estate, or concentrated investments, finding that liquidity can be costly. That’s where an irrevocable life insurance trust (ILIT) becomes a powerful tool.

1. What Is an ILIT?

An irrevocable life insurance trust is a type of trust designed to own and control a life insurance policy outside of your taxable estate. By doing so:

• The death benefit is not subject to estate tax.
• You can use the proceeds to provide liquidity to pay estate taxes, fund buy-sell agreements, or equalize inheritances.
• Ownership and control of the policy are handled by the trustee, following the terms you set in the trust agreement.

2. Why ILITs Still Matter Under a Permanent $30M Exemption

While the exemption has stabilized, large estates can still face significant estate taxes:

• Investment growth and business appreciation may push estates above the threshold over time.
• Non-liquid assets can make it difficult for heirs to pay estate taxes without selling valuable holdings.
• Life insurance held personally increases the taxable estate—turning a tax-free asset into a taxable one.

The ILIT removes the policy from your estate and ensures the full death benefit is available to your heirs without incurring a 40% tax hit.

3. How an ILIT Works

The basic ILIT structure involves:

1. Creating the trust. You work with an estate planning attorney to draft the ILIT document, naming a trustee (not you) and beneficiaries.
2. Funding the trust. You transfer cash to the trust each year to cover premiums.
3. Trust purchasing life insurance. Typically, a large permanent policy (whole life, universal life, or indexed universal life) designed to last your lifetime.

OR

1. Transferring an existing policy to the trust. An existing life insurance policy can be transferred to the trust. This option results in a taxable gift for the fair value (not the face value) of the policy and requires the insured to survive three years after the transfer before the policy is excluded from the estate.
2. Crummey notices.  If you make annual gifts to the trust to pay premiums, the trustee issues “Crummey notices” to beneficiaries, preserving the annual gift tax exclusion.
3. Tax-free death benefit. Upon your passing, the death benefit is paid to the trust, outside your estate, for the trustee to distribute or manage according to the trust terms.

4. Strategic Benefits for $30M+ Estates

Liquidity for Estate Taxes
The ILIT can loan money to, or purchase assets from, the estate to cover taxes—avoiding a forced sale of illiquid assets.

Estate Value Reduction
By moving ownership to the ILIT, you remove the policy’s death benefit (and future growth in cash value) from your estate.

Equalizing Inheritances
For families with illiquid concentrated assets (e.g., a family business), ILIT proceeds can provide cash to children who are not active in the business, avoiding fractional ownership disputes.

Asset Protection
ILIT-held funds are generally protected from beneficiaries’ creditors and divorce settlements.

5. Common ILIT Structures

• Single Life ILIT. One policy on one person’s life (common for single individuals).
• Second-to-Die ILIT. A survivorship policy insuring both spouses that pays out at the second death, which is when estate tax is typically due.
• Funded ILIT. The trust is seeded with income-producing assets to self-fund premiums.

6. Key Considerations

• Once established and funded, generally, you cannot change ownership or retrieve the policy.
• If you transfer an existing policy into the ILIT, you must survive three years for it to be excluded from your estate (IRC §2035).
• Premium Funding. Requires annual gifting discipline and Crummey notice compliance.
• Trustee Choice. Choose a responsible trustee who understands fiduciary duties and the importance of following the ILIT rules.
• Generation Skipping Transfer (GST). You can structure the trust as a generation-skipping transfer, meaning that the trust is excluded from the estate of future generations.

7. Example

Case Study:
A married couple, both age 60, has a $35M estate composed of:

• $15M business
• $10M real estate
• $10M investment portfolio

Without planning, their heirs could face a $2M estate tax bill. The couple creates a second-to-die ILIT owning a $5M life insurance policy. Premiums are funded with annual exclusion gifts. When the second spouse passes, the ILIT receives $5M tax-free, which the trustee uses to loan funds to the estate to pay taxes—preserving the business and real estate for the next generation.

8. Where ILITs Fit in the Big Picture

In the $30M exemption era, ILITs are less about racing against a legislative deadline and more about:

• Providing flexibility for future tax bills.
• Preserving family assets  for the next generation.
• Ensuring control over how liquidity is deployed after your passing.

Conclusion

For families at or above the $30M exemption threshold, an ILIT can be one of the most cost-effective, tax-efficient ways to prepare for estate liquidity needs. It removes life insurance from your taxable estate, provides cash when it’s needed most, and protects that cash for your heirs.

Our next post will explore SLATs, GRATs, and CRATs—three flexible trust strategies that can move appreciation out of your estate while providing income and preserving access for your family.