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Using ILITs and CRTs Together: Structuring Insurance to Deliver Both Charity and Heir Benefits

High-net-worth (HNW) families frequently pursue split-interest estate plans that accomplish two simultaneous goals: maximize philanthropic impact and preserve or replace wealth for heirs. Combining an Irrevocable Life Insurance Trust (ILIT) with a Charitable Remainder Trust (CRT) is a commonly used, powerful strategy to accomplish both objectives while managing estate-tax exposure and preserving liquidity. This article explains practical structures, tax mechanics, illustrative numbers, pros and cons, and implementation considerations for clients in the United States (with an emphasis on New York, California, and Texas).

Quick primer: What each vehicle does

  • ILIT (Irrevocable Life Insurance Trust)

    • Owns life insurance (term, universal, or survivorship) outside the insured’s taxable estate.
    • Pays policy proceeds to trust beneficiaries (usually heirs) income-tax-free.
    • Premiums are funded by annual gifts (Crummey notices) or a single gift; careful drafting avoids inclusion under the 3‑year transfer rule.

  • CRT (Charitable Remainder Trust)

    • Donor transfers assets into the trust, which provides a fixed or unitrust income stream to non-charitable beneficiaries (often the donor or spouse) for life or a term of years.
    • At trust termination, the remainder goes to one or more charities.
    • The donor receives an immediate partial charitable income-tax deduction based on the actuarial present value of the remainder interest (calculated with the IRS Section 7520 rate).

Authoritative sources: IRS guidance on estate and gift taxes and the mechanics of charitable trusts is essential reading — see the IRS estate and gift taxes overview and charitable remainder trust rules for trust valuation and deduction mechanics:

Why combine an ILIT with a CRT?

Combining an ILIT and CRT lets a HNW donor:

  • Obtain charitable income-tax benefits and create an income stream (CRT) while removing appreciated assets from the taxable estate.
  • Keep insurance proceeds out of the taxable estate (ILIT) to provide liquidity or equalize inheritances for heirs who do not receive the charitable remainder.
  • Preserve family wealth and cash flow for estate settlement, taxes, and distributions without negating the donor’s philanthropic goals.

A typical client profile: a married couple in New York with a $30M gross estate who wishes to donate $5–10M to a family foundation or university, provide lifetime income to themselves, and leave equal inheritances to two or three children.

Two common structures

  1. CRT reduces estate; ILIT replaces value to heirs (most common)

    • Client funds a CRT with appreciated assets (securities, real estate, or business interests). The CRT pays the donor (or spouse) an income stream; remainder goes to charity.
    • Separately, the client funds an ILIT with a life insurance policy sized to replace the value of assets transferred to the CRT for family heirs.
    • Result: philanthropic gift is achieved, donor receives income tax deduction and lifetime income, and heirs receive insurance proceeds outside estate.

  2. CRT funds lifetime income and partially funds ILIT premiums

    • CRT distributions can be used indirectly to fund gifts to the ILIT (via annual gifts to the ILIT or loans), but careful structuring is required to avoid tax or trust qualification issues. Typical practice is to have the donor retain control of how CRT income funds the ILIT premium payments (subject to gift tax rules).
    • Note: CRTs themselves rarely purchase life insurance on donors because owning life insurance in the CRT reduces charitable deduction and complicates tax treatment.

Illustrative numbers (U.S. federal tax context)

Assumptions (2024 federal figures):

  • Federal estate tax exemption (per person): $13.61 million (IRS; subject to annual adjustment).
  • Top federal estate tax rate: 40%.
  • Example estate: Gross $30M; desired charitable legacy: $10M.

Basic illustration (simplified):

  • Without planning: taxable estate = $30M − $13.61M exemption = $16.39M → potential federal estate tax ≈ $6.556M (40% of $16.39M).
  • With CRT removing $10M of value (and a properly structured deduction): estate effectively reduced to $20M → taxable estate = $20M − $13.61M = $6.39M → tax ≈ $2.556M.
  • Net estate-tax savings (federal) ~ $4M. That tax savings can be used to justify funding an ILIT life insurance policy to deliver the post-tax replacement to heirs.

Caveats:

Comparing outcomes: ILIT vs CRT vs Combined

Purpose Primary benefit Typical tax outcome Best use case
ILIT only Keeps proceeds out of estate; provides liquidity to heirs No income tax on death benefit; estate exclusion if properly structured Replace estate liquidity or equalize inheritances
CRT only Income stream + charitable deduction; reduces taxable estate Partial income-tax deduction today; remainder to charity reduces estate Donor wants lifetime income + philanthropy; less focus on heir replacement
ILIT + CRT Charity + lifetime income + replacement for heirs Income-tax deduction; estate reduced; insurance proceeds kept out of estate HNW donors who want philanthropic legacy and full heir replacement/liquidity

Implementation considerations (New York, California, Texas specifics)

  • State estate/inheritance tax: New York and some other states have state-level estate tax thresholds far lower than federal exemption. California and Texas do not have state estate taxes currently, but New York does; structuring must account for state rules.
  • Premium funding and gifts: Use Crummey provisions for annual premium gifts to the ILIT; for large single premiums consider gift-tax planning (use of lifetime exclusion).
  • Three-year inclusion rule: Transfers of existing policies to an ILIT within three years of death may be pulled back into the taxable estate (IRC §2035). New policies purchased by the ILIT avoid this.
  • Underwriting and carriers: For large-case, guaranteed or survivorship universal life, carriers commonly used include New York Life, Northwestern Mutual, Prudential, Pacific Life, and Lincoln Financial Group. Pricing is case-specific and depends on age, underwriting class, policy type (GUUL, IUL, or survivorship), face amount, and premium pattern.

Market reality and sample provider notes

  • Major insurers with robust large-case underwriting for HNW clients:
    • New York Life — strong whole and universal life offerings and private client services; pricing varies by medical underwriting and policy design.
    • Northwestern Mutual — highly rated for permanent life and large-case management.
    • Pacific Life & Prudential — commonly used for survivorship/UL and large-case placements.
  • Pricing illustration (indicative only): a well-rated 60–65-year-old purchasing multi-million-dollar survivorship universal life often faces five-figure to low-six-figure annual premiums depending on face amount and objectives. Always obtain broker quotes as pricing is fact-specific. For publicly available consumer rate benchmarks, see Policygenius and Forbes Advisor:

Practical steps for advisors and clients

  1. Engage estate planning counsel experienced with split-interest trusts and trust-owned life insurance.
  2. Run scenario illustrations (estate-tax, income-tax, cash-flow) using current Section 7520 rates and state estate-tax rules.
  3. Coordinate trustees, philanthropic advisors, and life insurance brokers for large-case underwriting and product selection.
  4. Document ILIT gift mechanics (Crummey notices, trust language, gift-tax reporting) and avoid 3-year inclusion pitfalls.
  5. Periodically review: tax law, Section 7520 rates, and insurer financial strength.

For further reading within this charitable-insurance planning cluster, see:

Conclusion

ILITs and CRTs are complementary tools for HNW clients who want to be both generous and strategic. A CRT can accomplish meaningful philanthropy and lifetime income while reducing the taxable estate; an ILIT can replace transferred value with death benefits delivered outside of the estate to heirs. Precise results hinge on actuarial assumptions, Section 7520 rates, state estate-tax regimes (notably New York vs. California/Texas), and insurance underwriting. Work closely with trust counsel, a qualified life insurance broker, and philanthropic advisors to ensure the combined plan meets charitable objectives and family wealth-preservation goals.

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