Insurance Curator NEW YORK — High-net-worth individuals and estate planners are aggressively pivoting toward specialized life insurance strategies this quarter to mitigate a surge in federal tax liabilities following the Jan. 1 "sunset" of the 2017 Tax Cuts and Jobs Act (TCJA).
With the federal estate tax exemption now approximately half of what it was only months ago, families with assets exceeding $7 million are turning to Irrevocable Life Insurance Trusts (ILITs) and high-limit policies to provide the liquidity required to satisfy the 40% federal tax rate without liquidating family businesses or real estate holdings.
The expiration of the TCJA’s generous exemption limits, which peaked at $13.99 million per individual in 2025, has effectively widened the net for the federal estate tax, moving thousands of American families from "exempt" to "taxable" status virtually overnight. According to current Treasury Department projections, the new inflation-adjusted exemption for 2026 stands at roughly $7 million per person, leaving any assets above that threshold subject to a 40% levy at the time of death.
"We are seeing a historic shift in how wealth is protected," said Logan Baker, a senior wealth strategist at Mercer Advisors. "The 'use it or lose it' window of 2025 has closed, and we are now in the mitigation phase. For families who did not gift away their excess exemption before the sunset, life insurance has become the primary tool to avoid a fire sale of assets to pay the Internal Revenue Service."
The "Tax Cliff" Reality
The structural change to the tax code represents a significant reversal in wealth transfer policy. For nearly eight years, the TCJA provided a buffer that shielded the vast majority of affluent estates. However, the sunset provision—a feature of the original 2017 legislation—was designed to revert the code to pre-2018 levels if Congress failed to act.
For a married couple that was previously shielded for nearly $28 million in assets, the current 2026 landscape now leaves any estate value over approximately $14 million exposed.
"If you have a $30 million estate today, your heirs are looking at a potential tax bill of more than $6 million that they didn't face a year ago," said a spokesperson for The Quantum Group, an advanced planning firm. "The challenge for many of these families is that their wealth isn't in cash. It’s in commercial real estate, private equity, or family-owned companies. You can't just write a check to the IRS for $6 million without hurting the business."
Life Insurance as a Liquidity Engine
The strategic use of life insurance in this context is not about the death benefit as "income," but rather as a "liquidity engine." When a high-net-worth individual dies, the federal estate tax is generally due in cash within nine months.
Financial advisors are increasingly recommending the Irrevocable Life Insurance Trust (ILIT) as the preferred vehicle for this strategy. By housing a life insurance policy within an ILIT, the proceeds of the policy are not considered part of the decedent’s taxable estate. This allows the death benefit to be paid out 100% tax-free, providing the heirs with immediate cash to pay the estate tax on other, illiquid assets.
"It is often overlooked that life insurance proceeds themselves are typically included in an individual’s taxable estate if they own the policy personally," according to a recent analysis by the law firm Husch Blackwell. "Forming an ILIT to hold those policies is an essential way to remove those proceeds from the tax calculation, effectively using tax-free dollars to pay a taxable debt."
Leveraging Annual Gifting
To fund these large policies, advisors are leveraging the 2026 annual gift tax exclusion, which remains a key component of the current tax code. For 2026, the IRS has maintained the annual gift tax exclusion at $19,000 per recipient.
Wealthy individuals are using "Crummey" powers—a legal mechanism that allows gifts to a trust to qualify for the annual exclusion—to transfer the cash needed for insurance premiums into the ILIT without eating into their remaining lifetime exemption.
"By gifting today’s assets into a vehicle that funds life insurance premiums, clients can leverage those assets to maximize the value passed to the next generation," noted Ash Brokerage in a 2025 planning brief. "It’s about turning a $19,000 annual gift into a multi-million dollar tax-free liquidity pool for the future."
Impact on Small and Mid-Sized Businesses
While the estate tax is often characterized as a concern only for the "ultra-wealthy," the 2026 sunset has brought the issue to the doorstep of mid-sized business owners and farmers. In many regions, the value of land and equipment alone can easily push a family farm over the $7 million mark.
The American Farm Bureau Federation has previously warned that estate taxes are a leading cause of the breakup of multi-generational farms. Life insurance policies, specifically "second-to-die" or survivorship policies that pay out only after both spouses have passed, are being used to ensure these businesses can stay in the family.
"The goal is for the insurance company to pay the tax, not the farm," said Shannon Beahan, a certified financial planner. "A survivorship policy is often more affordable than two individual policies and provides the cash exactly when the tax bill is triggered—at the second death."
Risks and Considerations
Despite the tax advantages, experts warn that these strategies require meticulous legal maintenance. Because ILITs are irrevocable, the grantor gives up control over the policy and the assets within the trust.
"Once an irrevocable gift is made, the asset no longer belongs to the donor," cautioned advisors at Citizens Private Bank. "Careful modeling is required to ensure that the individual is not gifting away liquidity they might need for their own lifestyle or medical care in their later years."
Furthermore, the IRS has historically scrutinized ILITs and the "Crummey" notices sent to beneficiaries. Failure to strictly follow the administrative requirements can result in the insurance proceeds being pulled back into the taxable estate, defeating the purpose of the strategy.
Looking Ahead
As the 2026 tax landscape solidifies, many in the financial industry are watching for further legislative shifts. While some lawmakers have proposed making the higher TCJA-era exemptions permanent, the current political climate has left the sunset in place for the foreseeable future.
For now, the urgency in the wealth management sector remains high. Professionals urge that while the "pre-sunset" window of 2025 has passed, the "post-sunset" reality of 2026 makes active management more critical than ever.
"Waiting for a legislative fix that may never come is a risky gamble," Baker said. "The law as it stands today requires a proactive approach. Life insurance isn't just a safety net anymore; it’s a strategic necessity for preserving a legacy in this new tax era."
About the Data:
- Current Individual Exemption (2026): Approx. $7 million (estimated inflation adjustment from the $5 million 2011 base).
- Federal Estate Tax Rate: 40% (remains unchanged post-sunset).
- Annual Gift Exclusion (2026): $19,000 per individual / $38,000 per married couple.