Insurance Curator High net worth (HNW) families in the United States increasingly use Irrevocable Life Insurance Trusts (ILITs) to transfer wealth, provide estate liquidity, and mitigate transfer taxes. This practical guide walks through the why, how, and commercial options for constructing ILITs tailored to HNW clients — with U.S. federal and state tax context, real-world provider notes, and actionable steps advisors and trustees can follow.
What is an ILIT and why HNW families use one
An Irrevocable Life Insurance Trust (ILIT) is a trust that owns and is the beneficiary of life insurance policies. Because the grantor gives up control and incidents of ownership, the death benefit generally stays out of the insured’s taxable estate, avoiding federal estate tax inclusion and providing immediate liquidity to pay taxes, equalize inheritances, and protect family wealth from creditors.
Primary benefits for HNW clients:
- Estate tax mitigation (federal and many state-level estate taxes)
- Immediate, tax-free liquidity for estate settlement or business succession
- Creditor and divorce protection if properly structured under applicable state law
- Control over timing and conditions of distributions to beneficiaries
For background on structuring to keep policies out of the taxable estate, see: How to Structure an ILIT to Keep Large Life Policies Out of the Taxable Estate.
Key U.S. tax context (numbers that matter)
- Federal estate tax exemption (inflation-adjusted): approximately $13.6 million per individual (IRS—see current figures at the time of planning). Estates above the exemption may face a top federal transfer tax rate of 40%. Source: IRS federal estate and gift tax guidance (https://www.irs.gov/businesses/small-businesses-self-employed/federal-estate-and-gift-taxes).
- Many states impose their own estate or inheritance taxes (e.g., New York, Massachusetts, Oregon). Other states such as Florida and California do not have a state estate tax. For a current state-by-state overview, see Tax Foundation: https://taxfoundation.org/state-estate-and-inheritance-taxes/.
Illustrative impact: if an estate of $50M exceeds exemptions, a properly structured ILIT owning $10M of life insurance can supply tax liquidity that otherwise might require selling business interests or real estate.
Step-by-step: Setting up and funding an ILIT (practical workflow)
- Engage counsel and tax advisor — ILITs are irrevocable and must meet IRS and state requirements. Coordinate estate counsel, wealth manager, and life insurance broker.
- Draft the trust document — appoint a trustee (bank trustee or trusted independent trustee), set distribution rules, trustee powers, and Crummey notice mechanics.
- Decide trust type — grantor vs non-grantor ILIT (see comparison below). For many HNW clients, a non-grantor ILIT prevents estate inclusion but requires careful funding planning.
- Select insurer & product — choose between single-life permanent, survivorship (second-to-die), guaranteed universal life (GUL), or indexed universal life (IUL) depending on objective (cost-efficiency vs permanence).
- Fund the trust — typically by annual gifts to the ILIT equal to the insurance premiums, often using annual gift tax exclusions and Crummey withdrawal powers. See more on gifting mechanics: Crummey Powers and Annual Exclusion Gifting: Making ILIT Contributions IRS-Proof.
- Trust purchases / applies for the policy — ILIT becomes owner and beneficiary. Make sure the insured executes any required medical authorizations and policy application signatures as required.
- Ongoing administration — trustee sends Crummey notices, pays premiums, documents gifts, and coordinates with advisors. For premium funding options, see: Funding Strategies for ILITs: Premium Payments, Gifts, and Trust Treasury Options.
Grantor vs Non-Grantor ILIT — quick comparison
| Feature | Grantor ILIT | Non-Grantor ILIT |
|---|---|---|
| Estate inclusion risk | Higher (if grantor retains incidents of ownership) | Lower when properly drafted |
| Income tax on trust earnings | Grantor taxed on trust income (may be advantageous) | Trust taxed; trust rates can be high |
| Premium funding mechanics | Often simpler (payor may be grantor) | Requires strict gift documentation and Crummey notices |
| Common use by HNW | Used when income-tax advantages are desired | Most-used when strict estate exclusion is priority |
For deeper tax implications and best practices: Grantor vs Non-Grantor ILITs: Tax Implications and Best Practices for HNW Clients.
Product choices, providers, and pricing realities (U.S. market)
HNW ILITs typically use permanent life products from large mutual and stock carriers known for strong ratings and estate planning orientation:
- MassMutual, New York Life, Northwestern Mutual, Prudential, John Hancock — commonly used for high face-amount guaranteed products and survivorship structures.
- Brokers and platforms: Policygenius, Haven Life (MassMutual), and full-service brokerages can source competitive underwriting and placement.
Pricing realities:
- Term life is inexpensive vs permanent — e.g., market 20-year term quotes for healthy individuals can be a few dozen dollars to a few hundred dollars per month (Policygenius market data). Source: Policygenius life insurance cost overview — https://www.policygenius.com/life-insurance/how-much-does-life-insurance-cost/.
- Permanent products (GUL, IUL, survivorship) are substantially more expensive but provide lifetime coverage and estate planning certainty. For HNW clients:
- Guaranteed Universal Life (GUL): may cost several thousand to tens of thousands of dollars per year for six- or seven-figure face amounts depending on age and underwriting.
- Survivorship (second-to-die) policies for a $5M–$20M death benefit for a 55/55 couple may require annual premiums or single-premium infusions ranging widely (typical ranges depend on health class, product guarantees, and market assumptions).
- Premium financing (banks like Bank of America/Merrill, Goldman Sachs Private Wealth, and specialty lenders) can be used to leverage capacity — financed loans typically bear an interest spread and are priced case-by-case; typical lending rates vary with market conditions and client credit.
Because pricing is highly dependent on age, health class, product guarantees, and underwriting credits, always request carrier quotes through a broker experienced with HNW placements.
Common pitfalls and governance
- Failure to remove incidents of ownership (can pull the policy back into estate)
- Poor Crummey notice administration (threatens annual exclusion treatment)
- Underestimating trustee workload — ILIT trustees must track contributions, notices, and premium payments
- Using unsuitable products (e.g., underfunded IULs that lapse)
Advisors should work through these common mistakes proactively: Common ILIT Implementation Mistakes and How HNW Advisors Avoid Them.
Where geography matters
ILIT planning is national in form but state law controls trust validity, creditor protection, and state estate taxes. Typical HNW hotspots with distinct planning needs:
- New York City and Westchester (NY) — state estate tax considerations
- San Francisco Bay Area (CA) — high asset concentrations; consider community property/titling for spouses
- Miami / Palm Beach (FL) — favorable state tax environment (no FL state estate tax) but beware domicile issues when planning
Next steps for HNW clients and advisors
- Gather net worth schedule and estate map (liquidity needs, illiquid assets, family goals).
- Run carrier quotes for permanent solutions (multiple carriers) and request survivorship pricing where appropriate.
- Coordinate with an estate attorney and CPA on trust drafting, Crummey notices, and gift tax implications.
- For premium financing options, obtain term sheets from banks and evaluate interest-rate sensitivity.
For guidance on governance and trustee selection after funding, see: ILIT Governance: Trustee Selection, Distribution Rules, and Policy Management.
Sources and further reading
- IRS — Federal Estate and Gift Taxes: https://www.irs.gov/businesses/small-businesses-self-employed/federal-estate-and-gift-taxes
- Policygenius — How much does life insurance cost?: https://www.policygenius.com/life-insurance/how-much-does-life-insurance-cost/
- Tax Foundation — State Estate and Inheritance Taxes: https://taxfoundation.org/state-estate-and-inheritance-taxes/
If you’re advising an HNW client, assemble underwriting proposals from multiple carriers, coordinate trust drafting with specialized counsel, and model sensitivity to interest rates and policy performance before committing to large permanent placements.