The Liquidity Bridge: ILIT & Premium Financing

The Liquidity Bridge: ILIT & Premium Financing

Estate taxes are due 9 months after death, in cash. Don’t fire-sale your business to pay the IRS. How to use leveraged life insurance to pay the tax bill for pennies on the dollar.

Dec 29, 2025 Code Authority: Team BMT RETIREMENT > ESTATE PLANNING

Executive Summary

  • The Liquidity Crisis: If you have a $100M estate (Business + Real Estate), you owe ~$40M in estate taxes. The IRS demands Cash within 9 months. If you don’t have $40M cash sitting idle, your heirs must sell the trophy assets at a “fire-sale” discount to pay the government.
  • The Fortress (ILIT): You create an **Irrevocable Life Insurance Trust (ILIT)**. This trust buys a huge life insurance policy on your life. Because the Trust owns the policy (not you), the $40M death benefit is **100% Income Tax-Free and Estate Tax-Free**.
  • The Leverage (Premium Financing): Instead of selling investments to pay the massive premiums (e.g., $1M/year), you borrow the premiums from a bank. You pay only the interest. The insurance policy’s cash value grows, aiming to exceed the loan interest (Arbitrage).

The “Incidents of Ownership” Trap

IRS Red Line: If you retain ANY control over the policy (e.g., right to change beneficiaries, borrow against cash value personally), the IRS will pull the entire death benefit back into your taxable estate.
👉 The 3-Year Rule: If you transfer an existing policy into an ILIT and die within 3 years, it fails. You must have the ILIT purchase a new policy to be safe from day one.

Mechanic: The Pennies on the Dollar Strategy

Tax-Free
Death Benefit
Leverage
Bank Pays Premium
Liquidity
Instant Cash
Collateral
Policy + Assets

Simulation: Paying a $40M Estate Tax Bill ($100M Illiquid Estate)

Cost to Settle the IRS Debt
Asset Sale (Fire Sale)Cost: $50M+
To get $40M cash quickly, you sell a $50M asset at a 20% discount. Massive wealth destruction.
Standard ILIT (Cash)Cost: $15M
You paid $15M in cumulative premiums over 20 years to get $40M benefit. Good, but ties up capital.
Premium FinancingCost: $5M (Net)
You only paid interest. The policy growth covered the loan principal at death. ROI is infinite.
Feature Personal Insurance ILIT (Trust Owned)
Estate Tax on Benefit Taxable (40% lost) Tax-Free (0% lost)
Control You Independent Trustee
Liquidity Use Any purpose Loans cash to Estate to pay taxes

“Rich people buy life insurance not because they need the money, but because they need the liquidity. An ILIT is the only asset that delivers a guaranteed pile of tax-free cash exactly when your estate needs it most.”

Essential Resources

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