August 6, 2026
How Wealthy Families Use Life Insurance Trusts To Cut Estate Taxes
Estate taxes can create challenges for families whose wealth is tied up in illiquid assets.
High-net-worth families facing large estate tax bills may be able to preserve more of their wealth by using an irrevocable life insurance trust, or ILIT, a strategy that can provide heirs with liquidity to pay taxes without forcing the sale of businesses, real estate, or other assets, Business Insider reports.
Estate taxes can create challenges for families whose wealth is tied up in illiquid assets. Rather than requiring beneficiaries to sell investments or family-owned companies to cover federal estate taxes, an ILIT allows a life insurance policy’s death benefit to be held outside of the taxable estate when structured correctly.
Currently, the federal estate tax applies at a 40% rate to taxable estates exceeding the federal exemption amount. Because the trust, not the individual, owns the policy, the insurance proceeds are generally excluded from the taxable estate, potentially saving qualifying families millions of dollars in taxes.
“It’s low-hanging fruit,” Robert Strauss, a partner at law firm Weinstock Manion, told the outlet. “It succeeds in removing the insurance from the estate.”
Beyond covering estate tax liabilities, ILITs can give grantors greater control over how inherited wealth is distributed. The trust can specify when and how beneficiaries receive assets, such as limiting distributions to education expenses or other approved purposes instead of unrestricted access to the funds.
The trusts may also provide an added layer of protection from creditors or divorce proceedings, depending on state law, according to Dan Griffith, director of wealth strategy at Huntington Bank, the outlet reports.
To qualify for the tax benefits, however, an ILIT must be carefully structured. The trust must own the life insurance policy and be named as its beneficiary. Estate planning attorneys often recommend having the trust purchase the policy rather than transferring an existing one, since policies transferred into an ILIT may still be included in the taxable estate if the insured dies within three years of the transfer.
Grantors also typically make annual cash contributions to the trust so it can pay policy premiums. Those contributions may qualify for the annual federal gift tax exclusion if trustees follow IRS rules, including notifying beneficiaries of their temporary right to withdraw the funds through what’s known as a Crummey notice.
Failing to provide those notices can jeopardize the trust’s tax treatment and potentially pull the insurance proceeds back into the taxable estate.
Financial experts also caution that ILITs are not appropriate for everyone.
Permanent life insurance policies, which are commonly used with these trusts, often carry significantly higher premiums than term life insurance. Estate planning professionals recommend evaluating whether the coverage aligns with a family’s long-term wealth transfer goals before establishing an ILIT.
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