ESTATE LIQUIDITY LIFE INSURANCE PLANNING

The coverage need is determined by the estate's estimated tax obligation, outstanding debt obligations, and income replacement needs of the surviving family — minus existing liquid assets. The calculation requires a current estate valuation, an estimate of the applicable estate tax rate and exemptions, and an analysis of which estate assets are liquid and which are not. The estate planning attorney and CPA should be part of this analysis.

The federal estate tax exemption is subject to change by Congress. As of 2025, the lifetime exemption is approximately $13.99 million per individual (adjusted annually for inflation), with a top rate of 40% on amounts above the exemption. Without congressional action, the exemption is scheduled to revert to approximately half of its current level after 2025, significantly increasing the estate tax exposure for many families. State estate tax exemptions vary and may be significantly lower than the federal exemption. Contact Kelly Insurance Group or your estate planning attorney for current figures.

A survivorship or second-to-die policy insures two people — typically a married couple — and pays the death benefit at the death of the second insured. Because the marital deduction defers estate tax until the surviving spouse dies, the death benefit is timed to arrive when the estate tax obligation actually arises. Premiums are typically lower than on individual policies of the same face amount because the carrier is insuring two lives.

Yes — and this is one of the primary purposes of ILIT-owned life insurance. The ILIT owns the policy and receives the death benefit estate-tax-free. The trustee can then loan funds to the estate or purchase estate assets to provide the estate with cash to pay the estate tax. This two-step process allows the estate to access the death benefit's liquidity without pulling it into the taxable estate.

IRC Section 6166 allows estates where more than 35% of the adjusted gross estate consists of a closely held business interest to pay estate taxes attributable to that interest in installments over up to 14 years, with interest accruing on the deferred amount. While 6166 provides time to pay, it does not eliminate the tax obligation and interest accrues during the deferral period. Life insurance provides immediate, interest-free liquidity that eliminates the need to defer under 6166.

If the goal is both estate liquidity and estate tax exclusion of the death benefit, the policy should be owned by an ILIT — not by the insured. If the death benefit is included in the taxable estate (because the insured owns the policy), it adds to the estate tax obligation at the same time it is providing liquidity to pay it. ILIT ownership removes the death benefit from the taxable estate while still making the funds available to pay the estate's obligations through a loan or purchase mechanism.