The ILIT Strategy: Removing Insurance from Your Taxable Estate
Tax Tips / Estate & Trust
The ILIT Strategy: Removing Insurance from Your Taxable Estate
💡 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.
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.
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.”
🔗 Related BMT Playbooks (Internal)
🛡️ Companion Strategy: QDOT for Non-Citizens 📉 Foundation: Annual Gift Tax Exclusion Rules ✅ Action Plan: Trust Funding Checklist🏛️ Institutional Resources (External)
📜 Legal Text: IRC § 2042 (Insurance Proceeds) ⚖️ Legal Basis: “Present Interest” Requirement (Crummey) 🏛️ IRS Official: Form 709 (Gift Tax)
BMT designs for tax reality, not theory.