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Death and (Estate) Taxes – Advance ILIT Planning for Life’s “Certainties”

by: Tyler Rosser, JD.
Wealth Strategist

Death and Taxes…as vexing to confront as they are certain to occur. In this area, we should heed the advice of Winston Churchill, who suggested that we “let our advance worrying become advance thinking and planning.”

Advance thinking and planning in the fields of life insurance and estate tax planning, although important for everyone, are even more essential and nuanced for those facing a taxable estate. The looming 40% estate tax presents a myriad of planning opportunities to transfer wealth outside of the taxable estate.

This e.Insight explores how using an Irrevocable Life Insurance Trust (ILIT) can provide significant relief from estate tax liability and allow a greater percentage of a decedent’s wealth to pass to the intended beneficiaries.

Irrevocable Life Insurance Trust (ILIT) Overview

An ILIT is an irrevocable trust that is primarily designed to serve as the owner and beneficiary of one or more life insurance policies insuring the life of the grantor. The primary advantage of utilizing an ILIT is the removal of the death benefit from the grantor’s gross estate. A life insurance death benefit only has a 60% effective realization rate when subject to estate tax, and if exemption amounts are reduced by one-half in December 2025 as anticipated, a greater percentage of estates will shift towards the taxable category1. If more estates become subject to estate tax, the ILIT will likely become an even more prevalent strategy for tax-efficient life insurance planning.

In addition to estate tax savings benefits, ILITs provide asset protection advantages by shielding assets from the creditors of the ILIT beneficiaries and the creditors of the grantor. By paying the death benefit into the trust as opposed to outright to the beneficiaries, an ILIT allows a grantor to stipulate how and when the life insurance death benefit is distributed to beneficiaries. This allows the grantor to secure asset protection for children, grandchildren and future generations.

An ILIT may also be designed so that the proceeds from any life insurance policy are made available as a source of liquidity to pay any estate tax owed. Funding estate tax liability upon death is a common concern for closely held business owners who have a significant portion of their wealth concentrated in illiquid, closely held business interests. Utilizing an ILIT strategy can prevent the estate of a deceased business owner from being forced to liquidate closely held business interests to pay estate tax.

To escape estate tax under an ILIT strategy, the grantor cannot have an “incident of ownership” (as defined in I.R.C. § 2042) over the life insurance policy such that the proceeds of the policy are subject to a power of disposition by the grantor2. In essence, the grantor must relinquish control over the life insurance policy for it to be excluded from the gross estate.

ILIT Premium Funding

A primary consideration and potential challenge to the implementation of a successful ILIT strategy is determining how to fund the annual premium payments. Because the primary (and oftentimes sole) asset of an ILIT is a life insurance policy, many ILITs lack adequate liquid assets to make the annual premium payment. The grantor cannot simply make the annual premium payments on behalf of the ILIT, because to do so would trigger gift tax consequences. The federal gift tax, which also has a rate of 40%, works in tandem with the federal estate tax to prevent the shifting of wealth during life in an attempt to avoid estate tax at death.

Based on factors such as the size of the annual premium payment, the grantor’s liquidity position, the grantor’s remaining gift and estate tax exemption and the specific terms of the ILIT, one or more of the following strategies may be ideal to fund premium payments.

I. Annual Exclusion Gifting (Crummey Withdrawal Rights)

A widely-used strategy to fund premium payments involves the grantor transferring cash to the ILIT and using the annual exclusion to avoid making a taxable gift. In 2023, the annual exclusion amount is $17,000 per recipient. If the grantor’s spouse is not a trust beneficiary, the grantor’s spouse may also gift this amount per recipient to the ILIT. The amount of the premium payment and the number of ILIT beneficiaries will determine whether annual exclusion gifting will satisfy the premium funding requirement.

For example, consider an ILIT that has eight current beneficiaries (grantor’s spouse is not a beneficiary) and annual premium payments owed totaling $250,000. The total amount of annual exclusion gifting available to these recipients by grantor and grantor’s spouse equals $272,000 ($17,000 x 2 x 8). Because the total amount of annual exclusion gifting available to the ILIT exceeds the premium payment owed, the grantor (with the participation of grantor’s spouse) can satisfy the premium payment through annual exclusion gifting to the ILIT and thereby avoid making a taxable gift.

For a gift to qualify for the annual exclusion, the gift must be a present interest gift3. On its face, a grantor’s contribution of cash to an ILIT for the purpose of paying the premium is not a present interest gift to the beneficiary recipients; rather, it is a future interest gift against which no annual exclusion is allowed. However, through the use of Crummey Withdrawal Rights, the gift to the ILIT can be transformed into a present interest gift that qualifies for the annual exclusion.

Crummey Withdrawal Rights (also called Crummey Powers) give the beneficiary a limited time to withdraw contributions made to a trust in order to make the contribution to the trust a present interest gift4. When a contribution is made to the trust, the trustee will send out a Crummey Notice to each beneficiary stating the right to withdrawal the beneficiary’s proportional amount of the contribution. The right to withdrawal should remain open for a period of at least 30 days to give the beneficiary a meaningful time to exercise. Upon expiration of the withdrawal period, the right to withdrawal lapses. While a grantor or trustee may not prohibit a beneficiary from exercising a withdrawal right, the presumption with this strategy is that beneficiaries will not exercise the right to withdrawal and the grantor’s contribution to the trust will be used to fund the premium payment.

II. Lifetime Exemption Utilization

If a grantor’s available annual exclusion gifting amount is inadequate to cover the entire premium, a portion of the grantor’s lifetime exemption can be applied to fund the difference. If the above example is modified such that the annual premium payments total $400,000 (increased from $250,000) and the beneficiary and annual exclusion assumptions remain constant ($272,000 of annual exclusion availability), the grantor could annually use $128,000 of lifetime exemption to cover the difference. Depending upon the size of the grantor’s estate, the grantor’s remaining exemption and additional estate planning strategies that have or will be implemented, this may or may not be an optimal strategy to fund the premium.

III. Premium Financing

It is common for the annual premium of a substantial life insurance policy to exceed the grantor’s annual exclusion, remaining estate tax exemption or available liquidity. Additionally, a grantor may not wish to utilize cash to fund ILIT insurance premiums if doing so would have a high opportunity cost (i.e., if the cash required for the premium could be invested elsewhere earning a higher rate of return). When these considerations are present, premium financing may be an attractive option.

  • Private (Family) Loan
    A private (intra-family) loan is a technique to allow the grantor to fund premium payments without triggering significant gift tax consequences. This strategy is particularly useful when the annual exclusion is inadequate to cover the premium payments and the grantor is willing to use liquid assets to fund the premium. The strategy involves the grantor (or a family trust or entity) transferring liquid assets to the ILIT to fund the premium and receiving an interest-only promissory note from the ILIT in return. The annual interest payments can be funded through annual exclusion gifting or by accessing the cash value of the policy, and the principal balance can be satisfied from death benefit proceeds upon the grantor’s death.
  • Third-Party (Bank) Loan
    Using a third-party lender to lend directly to the ILIT allows the grantor to retain assets in higher returning investments and thereby limits the grantor’s out-of-pocket commitment to finance premiums. The ILIT will need a source of funds for loan payments and likely collateral. Gifting may cover loan payments or payments may be made from the cash value of the policy. If loan payments are made from cash value, the overall economic value of the insurance policy will decrease. Collateral may come from the insurance policy itself or from a personal guarantee. However, a personal guarantee without the ILIT paying a corresponding surety or guarantee fee may subject the grantor to gift tax exposure.

The loan ultimately must to be repaid. Oftentimes, the loan will be repaid from the built-up cash value of the life insurance policy, the death benefit proceeds, monetization of a separate illiquid asset held by the trust (such as closely-held business interests or real estate) or a subsequent lifetime exemption gift by the grantor. Another common approach is to systematically transfer liquid assets to the ILIT over time through related wealth transfer strategies such as grantor-retained annuity trusts (GRATs) that avoid gift and estate tax inclusion. The remainder interest from a series of GRATs can be used to provide the ILIT with liquidity to pay all or part of the principal balance of the third-party loan.


While death and taxes might be life’s certainties, advance planning allows for optimization of outcomes. The difference in outcomes between an estate that has engaged in advance planning and one that has not can be so significant that classifying estate taxes as a “certainty” begins to feel like a misnomer. ILITs can be an excellent strategy for the mitigation and funding of federal estate tax, the protection and preservation of assets and the enhanced transfer of wealth to future generations; these strategies are most effective when carefully considered and planned in advance. Your Oxford team is well positioned to ensure that your plan is optimized for life’s “certainties” and that you have developed an optimal estate and wealth transfer strategy.

1The gift and estate tax exemption and the GST exemption are $12,920,000 in 2023. The exemptions are slated to return to $5,000,000 (indexed for inflation) as of December 31, 2025, unless modified or extended by Congress.
2See I.R.C. § 2042.
326 C.F.R § 25.2503-3 defines “present interest” as an “unrestricted right to the immediate use, possession, or enjoyment of property or the income from property.”
4See Crummey v. Commissioner, 397 F.2d. 82 (9th Cir. 1968).

The information in this presentation is for educational and illustrative purposes only and does not constitute tax, legal or investment advice. Tax and legal counsel should be engaged before taking any action. OFG-2303-25