What Is Estate Planning with Life Insurance?
Estate planning with life insurance is the practice of using a permanent life insurance policy, usually owned by an irrevocable life insurance trust (ILIT), to deliver income-tax-free cash to your heirs at death so they can pay estate taxes, settle debts, and keep illiquid assets like real estate or a business intact. The death benefit arrives within weeks, not years, and when the policy is owned correctly it is not counted in your taxable estate. That combination of speed, tax efficiency, and leverage makes life insurance the most common funding tool in a wealth transfer strategy. At The Infinite Wealth Group, Brandt Hudson designs and places that coverage while your attorney drafts the trust and your CPA confirms the tax picture.
Estate Tax Liquidity
Federal estate tax is generally due nine months after death. A death benefit gives your executor cash on hand instead of a forced sale.
ILIT Ownership
A properly structured irrevocable life insurance trust keeps the death benefit out of your taxable estate, and out of your children's estates too.
Survivorship Coverage
Second-to-die policies pay when the surviving spouse passes, exactly when the estate tax bill arrives, often at a lower premium than two single-life policies.
Legacy Equalization
Leave the business or the rental properties to the child who runs them and an equal death benefit to the ones who don't.
Why Estates Need Liquidity, Not Just a Will
A will decides who inherits; it does not create the cash needed to settle the estate. Estates large enough to owe federal estate tax are usually concentrated in illiquid assets: real estate, closely held business interests, farmland, and retirement accounts that trigger income tax when withdrawn. An estate can be worth tens of millions on paper while holding only a small fraction of that in cash.
Under IRC §6075 the federal estate tax return (Form 706) is due nine months after death, and under IRC §6151 the tax is payable when the return is due. Filing extensions and §6166 installment payments for some closely held business interests help at the margins, but when cash is short, executors sell on the estate's timetable rather than the market's: real estate goes at a discount, business interests go to the first buyer, and the family's long-term plan for those assets dies with the owner.
Life insurance solves the timing problem directly. The death benefit is paid to the named beneficiary, generally free of federal income tax under IRC §101(a), typically within weeks of the claim. If that beneficiary is a trust designed to lend money to the estate or buy assets from it, the executor has liquidity without liquidation.
The 2026 Federal Estate Tax Exemption
For deaths in 2026 the federal estate tax basic exclusion amount is $15,000,000 per person, up from $13,990,000 in 2025. The 2025 tax legislation (Public Law 119-21) amended IRC §2010(c)(3) to set the exclusion at $15 million for 2026 and make it permanent, indexed for inflation thereafter, eliminating the sunset that would have cut it roughly in half. Married couples electing portability can shelter a combined $30 million; amounts above the exemption are taxed at a top federal rate of 40 percent. Confirm the current figure on the IRS estate and gift tax page before relying on it.
A larger exemption does not make estate planning with life insurance obsolete; it changes who needs it and why. Families above the line still face a 40 percent rate on every dollar over it. Families below it still need liquidity for debts, income taxes on inherited retirement accounts, and equalizing inheritances, because a business or a set of rental properties does not divide neatly among children. And exemptions are set by Congress; a strategy that only works if the law never changes is not a strategy.
Tennessee has no state estate tax and no inheritance tax; its inheritance tax was fully repealed for deaths on or after January 1, 2016. Several other states still levy one, often with exemptions far below the federal figure, so clients with property in those states should have their attorney review state exposure.
Irrevocable Life Insurance Trusts (ILITs)
An ILIT is an irrevocable trust that owns a life insurance policy on your life so the death benefit is excluded from your taxable estate. Under IRC §2042, proceeds of a policy you own, or over which you hold any incident of ownership (the right to change beneficiaries, borrow against cash value, surrender, or assign), are pulled into your gross estate. When the trustee applies for and owns the policy from day one, you never hold those incidents, and the death benefit passes to the trust beneficiaries estate-tax-free and, if drafted as a dynasty trust, stays out of your children's estates as well.
Crummey powers make the premiums work. Gifts to a trust are normally gifts of a future interest, which do not qualify for the annual gift tax exclusion. So you gift cash to the trust, the trustee notifies each beneficiary in writing that they may withdraw their share for a limited window (typically 30 days), and when the window lapses the trustee pays the premium. Because the beneficiary held a present right to withdraw, the gift qualifies for the $19,000 per-recipient annual exclusion for 2026 (Rev. Proc. 2025-32). A married couple with four trust beneficiaries can move $152,000 a year into the trust without touching their lifetime exemption.
The three-year lookback under IRC §2035 is the trap to avoid: transfer an existing policy to the ILIT and die within three years, and the full death benefit returns to your estate. The clean solution is for the trustee to apply for a new policy as original owner, which is why we coordinate with your attorney so the trust is signed before the application is submitted. Where an existing policy must move, some attorneys use a sale to the trust for fair market value, which falls under an exception to §2035; that is a decision for your attorney and CPA.
Funding Options: Gifts, Premium Financing, and Survivorship Policies
There are three common ways to fund an ILIT policy, and the right one depends on cash flow, the size of the death benefit, and how much of your lifetime exemption you want to preserve.
Most ILIT policies are guaranteed universal life, indexed universal life with a strong secondary guarantee, or participating whole life, chosen for a guaranteed death benefit and premium stability rather than cash accumulation. We shop roughly 50 carriers because underwriting classes and survivorship pricing vary widely for the same two people.
- ✓Annual exclusion gifts. The simplest route: gifts within the annual exclusion, documented with Crummey notices, cover the premium. Larger premiums can use part of the lifetime exemption, reported on Form 709.
- ✓Premium financing. For eight-figure death benefits, a lender advances the premium, the policy's cash value serves as primary collateral, and you post outside collateral for early-year shortfalls. The trust owns the policy; you gift only the interest cost. It carries interest-rate and collateral risk and belongs only where the tax savings clearly justify the borrowing. See our premium finance page for mechanics and exit strategies.
- ✓Survivorship (second-to-die) policies. One policy insures both spouses and pays at the second death, which, because of the unlimited marital deduction, is when the federal estate tax bill actually arrives. Premiums are usually lower than two individual policies, and a spouse with health issues can often be covered when the other is insurable. The tradeoff: nothing is paid at the first death.
Wealth Transfer Strategies Compared
Life insurance is rarely the only tool in a wealth transfer strategy; it supplies liquidity and leverage to the structures your attorney creates. The table compares the five most common. Your attorney drafts and your CPA models each; we design the insurance that goes inside.
One point deserves emphasis: assets you give away during life keep your original cost basis, while assets held until death receive a step-up in basis to fair market value under IRC §1014. Highly appreciated real estate is often better held until death, with the estate tax paid from an ILIT death benefit, than gifted early and saddled with capital gains. Your CPA should model that tradeoff before any transfer.
| Strategy | What it does | Estate-tax effect | Who it fits | Main tradeoff |
|---|---|---|---|---|
| ILIT | Irrevocable trust owns a policy on the grantor's life and receives the death benefit | Death benefit excluded under §2042; premiums gifted via Crummey powers | Anyone near or above the exemption, or needing liquidity to keep assets intact | Irrevocable: you give up control and access to cash value |
| GST dynasty trust | Long-term trust for children, grandchildren, and beyond; often holds a survivorship policy | Assets and death benefit escape estate tax at every generation when GST exemption is allocated | Multi-generational families with appreciating assets | Complex GST allocation; some states limit trust duration |
| SLAT (spousal lifetime access trust) | One spouse gifts assets to a trust for the other spouse and descendants; can own life insurance | Gifted assets and growth leave both estates; grantor keeps indirect access through the beneficiary spouse | Couples who want to use exemption now but keep a safety valve | Divorce or the beneficiary spouse's death cuts off access; mirror-image SLATs risk the reciprocal-trust doctrine |
| IDGT + life insurance | Grantor trust buys assets from the grantor with a note; grantor pays the trust's income tax; trust may buy insurance to retire the note | Growth above the note rate escapes estate tax; grantor's tax payments are additional tax-free transfers | Owners of fast-appreciating businesses or real estate | Grantor bears the trust's income tax; adds little if the asset underperforms the note rate |
| Outright gift | Transfer cash, property, or a policy directly to heirs | Removed from the estate (subject to §2035 for policies); uses annual exclusion or lifetime exemption | Smaller transfers, or financially mature heirs | No creditor or divorce protection, no control, and appreciated property loses the step-up in basis |
Business Owners and Real Estate Investors
Business owners and real estate investors need estate planning with life insurance more than almost anyone, because their wealth is the least liquid and the hardest to divide. Three situations come up constantly.
For owners with strong cash flow and a short runway to exit, we also coordinate with your CPA on defined benefit plans, which allow large deductible contributions in the final high-income years.
- ✓Buy-sell funding. A funded buy-sell agreement guarantees a buyer for your interest at a pre-agreed price and gives your family cash instead of a minority stake in a company they cannot run. Since Connelly v. United States (2024), the structure also affects estate valuation; see our business protection page.
- ✓Key person coverage. If the business loses its founder and its credit line in the same month, the estate's largest asset can collapse before it can be sold. Company-owned key person insurance keeps it solvent through the transition.
- ✓Equalizing inheritances. One child runs the business or the properties; the others do not. Leaving the operating asset to the active child and an equal ILIT death benefit to the others is the cleanest answer, and for real estate investors it avoids a forced sale of properties meant to be held for the step-up in basis.
How the Process Works with The Infinite Wealth Group
The Infinite Wealth Group is a life insurance agency: we design and place the coverage, your attorney drafts the trust, and your CPA confirms the tax picture. Brandt Hudson runs the agency deliberately as a one-person practice in Chattanooga, Tennessee, working with clients nationwide over Zoom, so the licensed insurance professional who designs your policy also handles underwriting, delivery, and every annual review.
We do not draft legal documents or give tax advice. We make sure the insurance inside the plan is built correctly, priced competitively, and still performing years later, which is the part of estate planning that most often goes wrong.
- ✓1. Liquidity analysis. Estate tax, debts, income taxes on retirement accounts, and equalization needs at the second death, using your balance sheet and your CPA's projections.
- ✓2. Coverage design. Single-life versus survivorship, guaranteed versus participating, gifted versus financed, with illustrations from roughly 50 carriers.
- ✓3. Trust first, application second. Your attorney finalizes the ILIT; the trustee signs as owner and beneficiary so §2035 never applies.
- ✓4. Underwriting and placement. Exams, records, carrier negotiation, and shopping ratings across carriers if a health issue appears.
- ✓5. Annual review. Crummey notices, premium confirmations, policy performance, and any change in the exemption or your balance sheet.
Why Work with The Infinite Wealth Group on Estate Planning Coverage
- ✓Roughly 50 carriers for single-life and survivorship coverage, so a health issue on one spouse rarely ends the conversation.
- ✓One licensed insurance professional handles design, underwriting, and every annual review; nothing is handed off.
- ✓Trust-first sequencing with your attorney so the §2035 three-year lookback never applies to your policy.
- ✓Experience coordinating premium financing, ILITs, and business buy-sell coverage inside the same plan.
- ✓Chattanooga-based, working with clients nationwide over Zoom; no office visits required.
- ✓No legal drafting, no tax advice, no product pushed ahead of the plan: we build the insurance, your attorney and CPA own the rest.
Frequently Asked Questions
Is life insurance included in your taxable estate?
Yes, if you own the policy or hold any incident of ownership at death, the full death benefit is included in your gross estate under IRC §2042. If an irrevocable life insurance trust owns the policy from inception and you never held ownership rights, the death benefit is excluded. Policies transferred to a trust within three years of death are pulled back in under §2035.
What is the federal estate tax exemption for 2026?
For deaths in 2026 the federal basic exclusion amount is $15 million per person, or $30 million for a married couple using portability. The 2025 tax legislation made the exemption permanent and indexed it for inflation going forward, eliminating the previously scheduled sunset. Amounts above the exemption are taxed at a top federal rate of 40 percent. Confirm the current figure at irs.gov.
How does an ILIT avoid estate tax?
An ILIT is an irrevocable trust that applies for and owns the life insurance policy, names itself beneficiary, and receives the death benefit at your death. Because you never own the policy or hold incidents of ownership, IRC §2042 does not pull the proceeds into your estate. The trustee then distributes or lends the cash to your heirs or estate according to the trust terms.
What are Crummey powers and why does my ILIT need them?
Crummey powers give trust beneficiaries a temporary right, usually 30 days, to withdraw contributions you make to the trust. That present right converts your gift from a future interest into one that qualifies for the annual gift tax exclusion, $19,000 per recipient in 2026. When beneficiaries let the window lapse, the trustee uses the cash to pay premiums without you consuming lifetime exemption.
What is a survivorship or second-to-die life insurance policy?
A survivorship policy insures two people, usually spouses, and pays a single death benefit after the second death. Because the unlimited marital deduction generally defers federal estate tax until the surviving spouse dies, the benefit arrives exactly when the tax is due. Premiums are typically lower than two individual policies, and a spouse with health problems can often still be covered.
Does Tennessee have an estate or inheritance tax?
No. Tennessee repealed its inheritance tax for deaths on or after January 1, 2016 and does not impose a state estate tax, so Tennessee residents face only the federal estate tax. Residents who own property in other states, or who move, should ask their attorney about state-level estate and inheritance taxes, which in some states apply at thresholds well below the federal exemption.
Can life insurance be used to pay estate taxes?
Yes. That is its most common role in estate planning: the death benefit is paid to an ILIT within weeks, generally income-tax-free under IRC §101(a), and the trustee either lends cash to the estate or buys illiquid assets from it at fair market value. The executor then pays the tax due nine months after death without selling real estate or business interests under pressure.
What is a generation-skipping trust and how does life insurance fit?
A generation-skipping (dynasty) trust is designed to benefit grandchildren and later generations without incurring estate tax at each generation, provided GST exemption is allocated to it. Life insurance, often a survivorship policy, is a natural asset for these trusts because premiums are small relative to the tax-free death benefit, which multiplies the exempt amount for the descendants the trust serves.
Sources and further reading
- IRS: What's new — Estate and gift tax (2026 basic exclusion amount)
- IRS: Estate tax overview
- IRS Rev. Proc. 2025-32 (2026 inflation adjustments, annual gift exclusion)
- 26 U.S.C. §2010 — Unified credit against estate tax
- 26 U.S.C. §2035 — Adjustments for certain gifts made within 3 years of death
- 26 U.S.C. §2042 — Proceeds of life insurance
- 26 U.S.C. §6075 — Time for filing estate and gift tax returns
- 26 U.S.C. §6151 — Time and place for paying tax shown on returns
- 26 U.S.C. §101 — Certain death benefits
- 26 U.S.C. §1014 — Basis of property acquired from a decedent
- Connelly v. United States, 602 U.S. ___ (2024)
Reviewed by Brandt Hudson, licensed insurance professional. Last verified September 4, 2026. This page is educational and describes insurance products and general tax rules; it is not tax, legal, or investment advice. Confirm your situation with your CPA or attorney.