Estate planning: where term expires and permanent life insurance does the actual work.

Section 1

The federal estate tax problem.

Federal estate tax applies to the value of a decedent's gross estate above the federal exemption. For 2026 the exemption sits at approximately $13.99 million per individual or $27.98 million per married couple with portability elected on the first spouse's death. Above the exemption, the federal estate tax rate is 40 percent. State-level estate or inheritance taxes apply in roughly a dozen states with exemption thresholds often well below the federal level (Massachusetts and Oregon at $1 million, Washington around $2.2 million, others varying).

The Tax Cuts and Jobs Act of 2017 raised the federal exemption substantially; under current law that elevated exemption is scheduled to sunset on 1 January 2026 to approximately $7 million per individual ($14 million per couple), absent further legislation. The pre-sunset planning window has driven significant high-net-worth estate planning activity over the past 24 months. For households with current or anticipated net worth above the post-sunset thresholds, estate liquidity planning is a current and urgent need.

The problem the planner is solving is that estate tax is due in cash, typically within nine months of death (with extensions available in limited circumstances). For an estate concentrated in illiquid assets (closely held business interests, real estate, concentrated stock positions), the executor faces a choice between paying estate tax from existing cash (often insufficient), borrowing against the estate (expensive), or selling illiquid assets under time pressure (often at distressed prices). Life insurance inside an ILIT provides the alternative: federal-estate-tax-free liquidity available at the moment of death.

Section 2

Why term expires before the need does.

Estate planning needs are inherently permanent. A 50-year-old with a $20 million estate has an estate tax exposure that does not diminish with age and that crystallises at the moment of death, which actuarially is most likely in the 75-to-95 age range. A 30-year term policy bought at age 50 covers to age 80; for many estates, settlement occurs after that window. The buyer who relies on term for estate planning is structurally betting that they will die during the term coverage window, which is the wrong frame.

Permanent life insurance products (whole life, guaranteed universal life, indexed universal life, variable universal life, survivorship variants of each) provide the permanence that estate planning requires. The death benefit is paid whenever the insured dies, not just within an arbitrary 20- or 30-year window. For the high-net-worth household using life insurance specifically for estate liquidity, the permanence is the central feature.

The standard choice within the permanent product set for estate planning is whole life from a dividend-paying mutual carrier (Northwestern Mutual, MassMutual, Guardian, New York Life, Penn Mutual) for buyers who value the dividend participation and operational consistency of the mutual structure; or guaranteed universal life from one of the top GUL carriers (Pacific Life, Protective Life, Symetra, Lincoln Financial, John Hancock) for buyers who want the lowest-cost permanent coverage without the cash value accumulation. Survivorship variants of both are typically the cleanest fit for married couples planning estate liquidity at the second-to-die event.

Section 3

ILIT mechanics and the three-year lookback.

An irrevocable life insurance trust holds the life insurance policy on the grantor's life with the trust as owner and beneficiary. The grantor makes annual gifts to the trust to fund premium payments, with the trustee paying premium to the carrier. On the grantor's death, the carrier pays the death benefit to the trust; the trustee then distributes or loans the proceeds to the estate executor or to estate beneficiaries per the trust terms. The death benefit is excluded from the grantor's gross estate under IRC §2042 because the grantor is not the owner of the policy and does not hold incidents of ownership.

The three-year lookback under IRC §2035 pulls a transferred policy back into the gross estate if the grantor dies within three years of transferring an existing policy into the ILIT. The remedy is to have the ILIT originally apply for and own the policy from issue, rather than receiving a transferred policy. For new estate planning structures, this is straightforward. For existing policies the grantor owns and wants to transfer into an ILIT, the planner needs to manage the three-year window carefully and may consider alternative structures (sale to a defective grantor trust, for example) that avoid the lookback.

Crummey powers convert annual premium contributions to the ILIT into present-interest gifts qualifying for the annual gift tax exclusion ($19,000 per donee per year for 2026). The mechanic requires written notice to trust beneficiaries of each gift with a defined window (typically 30 days) during which the beneficiary can withdraw their share. The mechanic is technical and requires consistent execution; failure to execute properly can convert the gifts to future-interest gifts which do not qualify for the annual exclusion, exposing the grantor to gift tax or use of lifetime exemption.

Section 4

Survivorship coverage for married couples.

For married couples planning around the federal estate tax, a survivorship whole life or survivorship universal life policy is typically the most cost-efficient structure. The policy pays on the death of the surviving spouse, which is when federal estate tax actually comes due (between spouses, the unlimited marital deduction generally defers tax until the second death). Survivorship pricing is materially cheaper than single-life pricing because the carrier's expected payout date is later.

A $3 million survivorship whole life policy for a couple at age 55 in good health typically prices in the $2,500 to $3,800 per month range from a top mutual, compared to roughly $7,000 to $9,000 for single-life whole life on one spouse. Survivorship guaranteed universal life (S-GUL) for the same couple and face amount typically prices around $1,500 to $2,200 per month, providing the same permanent death benefit without the cash value accumulation.

The trade-off with survivorship is that the policy does not pay on the first death. For households where first-death liquidity is also needed (the surviving spouse is not financially independent), survivorship alone may not be the right structure. Layered structures combining a smaller single-life policy on one or both spouses with a larger survivorship policy can address both first-death and second-death needs at materially lower combined premium than equivalent single-life coverage on both spouses.

Section 5

Sizing the estate liquidity policy.

The right policy face amount depends on projected estate tax exposure at the date of likely death, not on current estate value. A 55-year-old with $15 million of current net worth growing at 4 percent real after distributions for 30 years would project to roughly $48 million at age 85; even with the 2026 sunset reducing the exemption to roughly $7 million per individual ($14 million per couple), the projected federal estate tax exposure could exceed $13 million. The right policy face amount is sized to that projected exposure, not to current net worth.

For households planning around state estate or inheritance tax in addition to federal, the sizing should include both. A Washington State resident with substantial estate value faces a top state estate tax rate of 20 percent above the $2.2 million state exemption, layered on top of the federal exposure. The combined tax burden requires layered policy sizing that includes both jurisdictions.

Working with a competent estate planning attorney is essential at this coverage tier. The DIY approach that works at lower coverage tiers does not transfer; the technical requirements of ILIT establishment, premium funding, Crummey notice execution, and integration with the broader estate plan exceed what most generalist insurance agents or financial planners can deliver competently.

Section 6

The ILIT funding discipline.

Once established, an ILIT requires consistent annual premium funding and Crummey notice execution. The grantor must remember to make the gift to the trust every year, the trustee must remember to send Crummey notices to beneficiaries within the required window, the trustee must remember to pay the premium to the carrier on schedule, and the records must be maintained in case of IRS examination.

Failures in this discipline can have substantial consequences. A missed Crummey notice converts the gift to future-interest, which fails the annual exclusion and exposes the grantor to gift tax or use of lifetime exemption. A missed premium payment can lapse the policy and destroy the entire structure. Most estate planning attorneys recommend retaining a corporate trustee or a trust administration service rather than relying on a family member trustee, specifically because the discipline failures of family member trustees are common and expensive.

Section 7

Caveats and sourcing.

Federal estate tax exemption and rates from IRC §2001 and §2010. ILIT structure governed by IRC §2042 (estate inclusion of life insurance) and IRC §2035 (three-year lookback for transfers within three years of death). Crummey powers from Crummey v. Commissioner, 397 F.2d 82 (9th Cir. 1968) and subsequent IRS guidance. Death benefit tax-free to beneficiary under IRC §101. Cash value tax-deferral under IRC §7702. State estate tax data per state revenue department publications. This page is educational content, not insurance, tax, or legal advice; consult a state-licensed insurance professional, an estate planning attorney, and a CPA before implementing an ILIT or binding policy at the coverage levels typical for estate planning.

Frequently asked

Common estate planning questions.