💧 Estate liquidity
Estate taxes, funeral costs, probate fees, and outstanding debts must be paid — often within 9 months of death. Life insurance provides immediate cash without forcing heirs to sell illiquid assets (real estate, business interests) at distressed prices.
⚖️ Estate equalization
When one heir inherits a business or property that can't easily be divided, life insurance equalizes the distribution. The heir receiving the illiquid asset keeps it; others receive the death benefit as their equivalent share.
🔄 IRA replacement / rescue
Ed Slott's core strategy: use RMDs to fund an ILIT-owned life insurance policy. You convert taxable IRA distributions into a tax-free, estate-tax-free death benefit — replacing the value that would have been lost to taxes under the inherited IRA 10-year rule.
🤝 Buy-sell agreements
Business owners use life insurance to fund buy-sell agreements — ensuring that a deceased partner's share can be purchased by surviving partners without disrupting business operations or forcing a distressed sale.
🏛 Trust coordination
Life insurance held inside an ILIT passes completely outside the taxable estate. Combined with the 2026 exemption cliff planning, a properly funded ILIT can transfer millions of dollars to heirs with zero income tax and zero estate tax.
📈 Dynasty wealth building
Second-to-die (survivorship) life insurance insures two lives and pays at the second death — when the estate tax is typically due. Premium costs are significantly lower than individual policies, making it the most cost-efficient tool for funding estate taxes on large dynastically held wealth.
The 2026 estate tax cliff — coordinate now
Current estate tax exemptions — $13.61M per individual and $27.22M per married couple — are scheduled to roughly halve when TCJA sunsets in 2026. Estates between $7M and $13.61M per person will suddenly face estate tax exposure they don't currently have. Life insurance funded and placed inside an ILIT before the sunset provides both the liquidity to pay future estate taxes and a mechanism to permanently remove the policy value from the taxable estate.
Second-to-die (survivorship) life insurance — estate tax funding at lowest cost
How it works: A survivorship policy covers two lives — typically a married couple — and pays the death benefit only at the second death. Because the policy doesn't pay until both insureds die, the actuarial risk is much lower than either individual policy, meaning premiums are significantly cheaper for the same death benefit amount.
Why it matters for estate planning: Federal estate taxes are not due until the death of the surviving spouse (through the marital deduction). A survivorship policy is specifically designed to be in force at that moment — providing the exact liquidity needed to pay estate taxes without forcing the sale of business interests, real estate, or investment portfolios.
ILIT coordination: Survivorship policies are almost always held inside an ILIT — keeping the death benefit completely outside the taxable estate of both spouses while ensuring the proceeds are available to pay estate taxes or fund inheritance distributions.
Life insurance as the IRA rescue strategy — Ed Slott's framework
"IRAs are the worst assets to leave in an estate — and life insurance is the best." Ed Slott's IRA rescue strategy converts the worst into the best: annual RMDs (taxable, mandatory) fund premiums inside an ILIT (tax-free, estate-tax-free). The tax paid on the RMD is the "admission price" for converting a heavily taxed inherited IRA into a clean, tax-free legacy. For a $1M IRA that would be fully taxed to heirs at 37% over 10 years, a well-structured ILIT-owned life insurance policy can deliver far more value to heirs after all taxes are considered.