The ILIT Strategy: Removing Insurance from Your Taxable Estate

Tax Tips / Estate & Trust

The ILIT Strategy: Removing Insurance from Your Taxable Estate

By Team BMT Dec 21, 2025

💡 Executive Summary

  • Problem: Life insurance death benefits are included in your taxable estate (40% tax).
  • Solution: An Irrevocable Life Insurance Trust (ILIT) owns the policy, not you.
  • Result: Proceeds become 100% tax-free liquidity to pay estate taxes.
⚠️ 3-YEAR LOOKBACK RULE
If you transfer an existing policy to an ILIT and die within 3 years, the proceeds are “clawed back” into your estate. New policies should be purchased by the trust directly.

For Ultra-HNW individuals (Tier L3+), the greatest risk is not market volatility, but the “Estate Tax Liquidity Crisis.” An ILIT is not an investment vehicle; it is a mechanism to purchase tax dollars for pennies.

🧐 Core Definition: Incidents of Ownership
To exclude proceeds from estate tax (IRC § 2042), you must surrender all rights: no right to borrow, change beneficiaries, or cancel the policy.

Performance Simulation

Tax Scenario ($10M Policy)
Personal Ownership (In Estate) $4.0M Tax Drag
$6M Net
ILIT Ownership (Strategic) $0 Tax (100% Efficiency)
$10M Net

The “Crummey” Mechanism

Step Action Strategic Intent
1. Gift Grantor sends cash Uses Annual Exclusion ($19k)
2. Notice Trustee sends Letter Creates “Present Interest”
3. Payment Trustee pays Premium Policy remains in force
“You don’t buy life insurance to make you rich. You buy it to keep your heirs from being poor due to a forced sale of assets.”
BMT designs for tax reality, not theory.