Insurance Curator WASHINGTON — High-net-worth individuals and estate planners across the United States are aggressively restructuring Irrevocable Life Insurance Trusts (ILITs) to shield assets as the clock ticks toward the Dec. 31, 2025, expiration of the Tax Cuts and Jobs Act (TCJA).
The looming "sunset" of the 2017 tax law is set to slash the federal estate and gift tax exemption by approximately 50%, moving from a 2025 high of $13.99 million per individual to an estimated $7 million in 2026. This shift has triggered a surge in "super-funding" strategies and trust modifications as wealthy families seek to lock in historically high exemptions before they vanish.
“We are seeing a ‘use it or lose it’ mentality take hold,” said Sarah Jennings, a senior estate strategist at a leading New York-based wealth management firm. “For families with estates exceeding $15 million, the failure to optimize an ILIT before the end of 2025 could result in an additional 40% tax hit on millions of dollars that would have otherwise passed to heirs tax-free.”
The Mechanics of the Sunset
The TCJA nearly doubled the base estate tax exemption when it was signed into law. However, because the provision was temporary, it is scheduled to revert to 2017 levels, adjusted for inflation, at the stroke of midnight on Jan. 1, 2026.
According to Internal Revenue Service (IRS) data, the current exemption allows a married couple to shield $27.98 million from federal estate taxes. Starting in 2026, that figure is expected to plummet to roughly $14 million to $15 million combined. For those whose estates exceed these thresholds, the federal government levies a 40% tax on every dollar above the limit.
The ILIT has long been a cornerstone of estate planning because it removes life insurance death benefits from the insured’s taxable estate. By transferring ownership of a policy to a trust, the proceeds can provide the liquidity necessary to pay estate taxes without forcing the sale of illiquid assets, such as family businesses or real estate.
Strategic "Super-Funding"
The primary strategy currently being deployed is the "super-funding" of ILITs. Rather than making annual gifts to the trust to cover premium payments—often utilizing the $19,000 annual gift tax exclusion—planners are urging clients to make large, lump-sum gifts using their remaining lifetime exemption.
“If you have $5 million of exemption left, moving that into an ILIT now ensures that even when the exemption drops to $7 million in 2026, that $5 million is already out of your estate and protected,” said Marcus Thorne, a partner at a Chicago-based tax law firm. “If you wait until 2026, you may find that your entire exemption has already been ‘used up’ by the law’s reduction, leaving no room for further tax-free gifting.”
Thorne noted that the IRS issued "anti-clawback" regulations in 2019, clarifying that the government will not penalize taxpayers who took advantage of the higher exemption levels if the exemption is lower at the time of their death. This has provided the legal green light for aggressive gifting through the end of 2025.
Modernizing the "Zombies"
Many existing ILITs, often referred to as "zombie trusts" by practitioners, were drafted decades ago when exemption levels were as low as $600,000 or $1 million. These older documents often lack the flexibility needed for today’s economic environment.
Planners are currently conducting "trust audits" to optimize these instruments. Key modifications include:
- Substituting Assets: Many ILITs allow the grantor to swap trust assets for assets of equal value. With interest rates remaining volatile, some are moving high-growth assets into the trust in exchange for cash or lower-yield bonds.
- Decanting: In states that allow it, trustees are "decanting" old trusts—pouring the assets of an outdated ILIT into a new trust with more favorable terms, such as broader investment powers or extended durations (Dynasty Trusts).
- Spousal Lifetime Access Trusts (SLATs): A popular variation involves the ILIT functioning as a SLAT, allowing a spouse to access the trust’s value during their lifetime, providing a safety net should the family’s financial situation change after making a large gift.
The Role of Private Split-Dollar Arrangements
For individuals who have already exhausted their lifetime exemptions or are hesitant to make large gifts, private split-dollar life insurance arrangements are seeing a resurgence.
In these setups, the grantor lends the ILIT the funds necessary to pay premiums. The loan is typically structured so the grantor is repaid the greater of the premiums paid or the policy’s cash value upon death, while the remaining death benefit—the "growth"—passes to heirs tax-free.
“Split-dollar is a way to move the appreciation of a life insurance policy out of the estate without using a significant amount of the gift tax exemption,” Jennings explained. “As the sunset approaches, this is becoming a vital tool for the ‘moderately wealthy’—those in the $15 million to $30 million range who are most affected by the exemption drop.”
Risks and Considerations
Despite the tax advantages, experts warn that ILITs are irrevocable. Once assets are moved, the grantor loses control over them.
“The biggest mistake people make is over-funding to the point of personal liquidity issues,” said Robert Chen, a financial analyst specializing in insurance products. “You cannot change your mind in 2027 and ask the trust for your money back. The IRS is also expected to increase audits on large gifts made in late 2025, so documentation and professional appraisals are non-negotiable.”
Furthermore, the "Crummey" power—a legal mechanism that allows annual gifts to a trust to qualify for the gift tax exclusion—requires strict administrative adherence. Failure to send timely "Crummey notices" to beneficiaries can disqualify the gift from the exclusion, potentially triggering unexpected taxes.
The Political Variable
While the sunset is written into current law, some analysts suggest that a shift in the political landscape following the 2024 elections could lead to legislative intervention. However, most advisors are telling clients not to count on it.
“Betting on Congress to extend the TCJA exemptions is a high-stakes gamble,” Thorne said. “Given the current federal deficit, there is significant political appetite to let these exemptions lapse to increase tax revenue. We are advising all clients to plan for the $7 million environment as the new reality.”
As the deadline approaches, insurance carriers are reporting increased processing times for high-value policies. Industry experts recommend that those seeking to establish or fund an ILIT begin the process no later than mid-2025 to ensure medical underwriting and legal filings are completed before the Dec. 31 cutoff.
For many, the next 20 months represent the final opportunity to utilize what has been described as the most favorable estate planning window in U.S. history.
“The door is closing,” Jennings said. “By this time next year, the queue for valuations and trust drafting will be out the door. The time for optimization is now.”