The Liquidity Engine: Irrevocable Life Insurance Trusts (ILIT)
The Liquidity Engine: Irrevocable Life Insurance Trusts (ILIT)
Asset rich, cash poor? How to prevent a “Fire Sale” of your business by creating instant, tax-free liquidity to pay the IRS.
Executive Summary
- The 9-Month Gun: Federal Estate Tax (40%) is due strictly 9 months after death. If your wealth is tied up in real estate or a private company, your heirs may be forced to sell assets at a 50% discount just to pay the tax.
- The Ownership Trap: If you own your life insurance policy, the death benefit is added to your taxable estate, increasing the tax bill. An ILIT owns the policy so the proceeds are 100% Income & Estate Tax-Free.
- The Rescue Mechanism: The ILIT receives the cash death benefit. It then purchases assets from your estate (or loans money to it), providing the estate with the cash needed to pay the IRS without selling the family business.
The “Crummey” Maintenance
To fund the premiums without triggering gift tax, you must use the “Annual Exclusion.” This requires sending physical “Crummey Letters“ to beneficiaries every year, notifying them of their right to withdraw the cash. Failure to do this kills the tax benefit.
Mechanic: The Liquidity Protocol
Outside Estate
Ownership Structure
9 Month Due
IRS Deadline
Tax-Free Cash
Death Benefit
Crummey Note
Annual Requirement
Simulation: The “Fire Sale” vs. The ILIT ($50M Estate)
Impact on Family Business Continuity
| Feature | Personally Owned Policy | ILIT Owned Policy |
|---|---|---|
| Control | You can change beneficiary | Trustee controls (Irrevocable) |
| Estate Tax | Included (Taxable) | Excluded (Tax-Free) |
| Creditor Protection | Low (Seizable) | High (Fortress) |
“Life insurance is not an investment; it is liquidity insurance. The ILIT ensures that the liquidity arrives exactly when the tax bill does, without the government taking a cut.”
Essential Resources
INTERNAL
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