When an ILIT Is Not Right: Alternatives and Hybrid Trust Solutions for HNW Families

High net worth (HNW) families use Irrevocable Life Insurance Trusts (ILITs) to keep large life insurance proceeds out of the insured’s taxable estate and to provide liquidity at death. But ILITs are not a one-size-fits-all solution. For many clients — particularly in New York, California, Florida, Texas and other HNW hubs — income needs, gifting capacity, health status, lender relationships, or control preferences make alternatives or hybrid structures more appropriate.

This article explains when an ILIT may not be the right fit, practical alternatives, and hybrid trust arrangements advisors commonly deploy for HNW families in the United States. It includes illustrative cost considerations, key trade-offs, and next steps an advisor should weigh in client conversations.

Why an ILIT may be unsuitable

An ILIT is powerful for estate tax mitigation, but it has downsides that disqualify it for some clients:

• Limited access to cash and control. ILIT beneficiaries typically cannot use trust cash before the insured’s death. Clients who need access to policy cash value or desire control may reject ILITs.
• Gifting constraints and Crummey notice mechanics. Funding premiums requires annual gifts eligible for the annual exclusion and often Crummey notices. Clients with limited gifting capacity or complex family dynamics may find this cumbersome. (See Crummey powers details in Crummey Powers and Annual Exclusion Gifting: Making ILIT Contributions IRS-Proof.)
• Health and insurability issues. If the insured’s health precludes affordable coverage, a traditional ILIT-funded new policy may not be possible.
• Premium-financing and lender risk. When premiums are financed, ILITs can create collateral monitoring and estate inclusion risks if structured or documented incorrectly. See ILIT Design for Premium-Financed Policies: Compliance and Estate Inclusion Risks.
• State law and community property complications. In community-property states (e.g., California, Texas), ownership and gifting rules complicate trust funding and may require special titling or spousal consents.
• Cost sensitivity for permanent solutions. Permanent life insurance (whole life, indexed or universal) can be materially more expensive than term; clients unwilling to pay the higher ongoing premiums may decline ILIT-funded permanent solutions.

Primary alternatives to an ILIT

Below are alternatives commonly recommended to HNW clients who need flexibility, liquidity, or different tax outcomes.

1. Spousal Lifetime Access Trust (SLAT)

• A SLAT is an irrevocable trust created by one spouse for the benefit of the other and family. It removes assets from the taxable estate while potentially allowing indirect spousal access.
• Benefits: estate tax reduction, potential access via spouse, flexible distributions.
• Risks: marital dissolution, reciprocity/clawback concerns if both spouses create SLATs symmetrically.
• Related reading: Grantor vs Non-Grantor ILITs: Tax Implications and Best Practices for HNW Clients.

2. Family LLC or Family Limited Partnership owning the policy

• Family entity owns the policy and family members own interests in the entity. Allows centralized management and potential valuation discounts.
• Benefits: control, centralized collateralization, built-in governance rules.
• Risks: complexity, IRS scrutiny on valuation discounts, potential estate inclusion if not structured properly.

3. Revocable living trust with purposely drafted buy-sell/liquidity provisions

• For clients who want flexibility and access to cash value, a revocable trust owning a life policy can be part of an integrated plan (with acknowledgment that policy proceeds will be in the taxable estate).
• Often combined with liquidity planning (e.g., retirement distributions, lines of credit) to meet estate tax obligations.

4. Split-dollar arrangements and corporate-owned policies

• Split-dollar (collateral-assignment or endorsement methods) can provide corporate or family business funding of premiums while giving family members economic recovery at death.
• Benefits: capital-efficient funding for key-person or buy-sell coverage.
• Risks: recent IRS guidance and valuation complexities; needs expert drafting.

5. Premium financing without an ILIT (or with hybrid ownership)

• Banks and private lenders lend to pay premiums; borrowers pledge other assets as collateral. This can be attractive when cash gifting is constrained.
• Typical private bank pricing (market-dependent): lenders may price at benchmark rates (e.g., SOFR) plus a spread — commonly in the range of SOFR + 150–300 basis points (1.50%–3.00%), depending on credit and borrower relationship. (Source: Investopedia — premium financing overview.)
• Risk: collateral calls, interest rate exposure, and potential estate-inclusion if loan documentation or trust design is incomplete. See further discussion in ILIT Design for Premium-Financed Policies: Compliance and Estate Inclusion Risks.

Hybrid trust solutions: combining flexibility and tax efficiency

Advisors increasingly create hybrid structures to balance estate tax exclusion with access and funding flexibility:

• SLAT + ILIT combination. One spouse funds a SLAT that owns part of the family’s insurance while an ILIT holds other policies — diversifying liquidity and access outcomes.
• ILIT with a premium-financed tranche and a donor-funded tranche. Splits the death benefit between bank-financed coverage (to minimize near-term gift requirements) and donor-funded smaller policies to preserve annual-exclusion gifts.
• Family LLC holding policy interests, with a “trustee-controlled” ILIT beneficiary. This provides centralized policy management, liquidity to pay premiums, and structured distributions at death.

Cost and carrier considerations (practical pricing examples)

Life insurance pricing varies by age, sex, underwriting class and product type. For HNW families, advisors should evaluate both carrier strength and price competitiveness. A few example carriers and pricing realities:

• Haven Life (MassMutual-backed) — strong online term life provider that offers competitive term pricing; typical 20-year term quotes for a healthy 40-year-old non-smoker male for $1M coverage are often in the $30–$60/month range depending on underwriting. (Source: Haven Life and general market quote data; see price comparisons at NerdWallet.)
• Northwestern Mutual and New York Life — major mutual carriers known for strong guaranteed whole-life and high-net-worth bespoke universal life products; permanent policy premiums for large face amounts ($5M+) can be in the tens of thousands annually and vary with product design and target cash-value accumulation. Expect multi-year premium schedules, often $50,000–$200,000+ annually for large-coverage permanent arrangements depending on age and guarantees.
• Premium financing lenders — major private banks such as JPMorgan Private Bank, Goldman Sachs, and regionals in Miami, Los Angeles, and New York routinely structure premium finance facilities for HNW clients. Market pricing often references SOFR + spread; typical spreads in well-structured deals are ~1.5%–3.0%, though sponsor relationships and collateral quality can materially reduce that cost. (Source: Investopedia — premium financing primer; market articles.)

Note: quoted ranges are illustrative. Always obtain carrier-specific illustrations and lender term sheets for client-specific pricing.

Comparative snapshot: ILIT vs Alternatives

When to choose which option (practical triggers)

• Choose an ILIT when estate tax exclusion is the priority, the client can commit to gifting or funding premiums, and the insured is insurable at reasonable rates.
• Choose a SLAT when spousal access is desirable and spouses are confident in marital stability and non-reciprocal trust design.
• Use a family LLC when centralized policy control, asset management, and governance are important and the family can handle valuation and compliance complexity.
• Employ premium financing when liquidity is constrained but the client wants large, permanent coverage, and they accept lender counterparty and interest-rate risks.

Next steps for advisors in New York, California, Florida, Texas and other U.S. markets

• Run multiple carrier illustrations (term & permanent) with firms such as Northwestern Mutual, MassMutual (Haven Life), Prudential and Transamerica to compare premium, crediting guarantees, and cash-value projections.
• Coordinate with private-banking partners for indicative premium-financing term sheets (expect SOFR + ~150–300 bps as a market reference).
• Model estate-tax and liquidity outcomes under realistic mortality and interest scenarios; stress-test for collateral calls and mortgage-rate analogues.
• Confirm gifting capacity and Crummey notice workflows; review Crummey Powers and Annual Exclusion Gifting: Making ILIT Contributions IRS-Proof.
• Avoid common drafting pitfalls by reviewing case studies: Common ILIT Implementation Mistakes and How HNW Advisors Avoid Them.

Regulatory and tax references

• IRS guidance on life insurance and estate taxes: https://www.irs.gov/businesses/small-businesses-self-employed/life-insurance-and-estate-taxes
• Premium financing primer and considerations: https://www.investopedia.com/terms/p/premium-financing.asp
• Consumer-facing pricing and market context (term/policy cost comparisons): https://www.nerdwallet.com/article/insurance/how-much-life-insurance-costs

If estate exclusion is your primary objective, ILITs remain a core tool. But modern HNW planning requires a menu of alternatives and hybrid structures—SLATs, family entities, premium financing and mixed-ownership designs—to deliver liquidity, control and tax efficiency in markets like New York, Los Angeles, Miami and Houston. Work closely with carriers, private banks and estate counsel to choose the structure and mechanics that match your client’s objectives, funding capacity, and tolerance for complexity.