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