As I approached death, I found myself thinking more about real estate tax plans and potentially large-scale tax bills my family might face if we were very lucky. To lead the way, I dig out how an irrevocable life insurance trust (ILIT) can help families save what is called death tax.
picture:
A couple in the late 1970s called them Yama himself and spent their entire lives saving and investing. They have built a thriving small business in Honolulu, bought some rental properties, and loosened some stocks that have performed well over the past few decades. By the time they both left, their property was worth about $50 million.
It sounds like a dream, right? Aside from the nightmare: The IRS showed up a 40% estate tax on all items tax bills above the exemption amount, which is $13.99 million per person in 2025 and $27.98 million for married couples.
This means Yamamoto’s real estate is about $8.8 million in taxes (40% of the $22.02 million).
That’s the problem: most of Yamahara’s wealth is related to their business and property. The estate does not have $9 million in liquid cash. To pay for the bill, the executor could force the sale and sell the assets below the market value to raise cash. Years of careful architecture and family heritage may be torn apart in one breath.
But there are better ways. Families can use life insurance to pay their bills instead of liquidating assets under pressure. Not only any life insurance policy, but it is also wrapped inside something called an Irrevocable Life Insurance Trust (ILIT).
Let me explain why this is one of the least assessed real estate plans the rich can make.
The magic of Illegal Life Insurance Trust (ILIT)
Here is the financial strategy: instead of having a life insurance policy in your own name, you create an ILIT and Let the trust own the policy. When you die, ILIT (not your property) collects tax-free death benefits. ILIT can then provide liquidity to pay estate tax or assign heirs as you direct.
Why so powerful? Because any expenses to enter ILIT are Not counted as part of your taxable property. Even if you have a huge estate and IRS’s huge life insurance payments have not doubled down.
Let’s run some numbers:
Suppose our friend Mr. Yamamoto has a $10 million life insurance policy within ILIT. If he owns the policy himself, payment will drive another $10 million to his taxable inheritance. This is another $4 million evaporated to taxes ($10 million x 40% death tax).
But is there Illit? The same $10 million policy is remitted to trusts outside the IRS scope and can be used to provide the estate with the liquidity required to pay tax bills. The family retains real estate, business, investments, and avoids panic for sale. This is a huge victory.
ILIT successfully removed insurance from the estate. It won’t deprive anyone of access to anything.
Flexibility: beneficiaries, trustees, and even “special friends”
One of the great things about cats is flexibility. You can choose almost anyone as a beneficiary: children, grandchildren, business partners, and even lifelong friends.
Historically, the Ilites were also a cautious way to provide services to unmarried partners, or to be honest, outside of marriage, “special friends.” If a person has a special friend who wants to always benefit for them physically and emotionally without a spouse, life insurance in a trust is a way for you to take care of your obligations.
scandal? perhaps. Actual? really.
Traditionally, ilits also lets you add structures. Don’t want your grandchildren to brag about their inheritance rights to Bentley and Tiktok’s influential equipment? Beautiful. You can instruct the trustee to release only the advance payments used for college tuition or on the house.
You can also protect the heirs from creditors, divorce disputes, and even their own wrong decisions. Trust and life insurance laws are strong in most states and merged together, they form a legal shield.
Think of it as “the money for the seat belt.”
How does ilit actually work
This setup must be accurately reviewed by the IRS. That’s why you should talk to a real estate planning lawyer to help you with the setup. Here is the script:
- Create ilit – You (grantor) set up a trust and name the trustee. This has to be “irrevocable” – which means that once it is done, you can’t return the money in person. Revocable trust in life is something you can change.
- ILIT Purchase This Policy – The trust does not have a life insurance policy, but rather buys and owns it. You can use cash to fund the trust, so you can pay premiums. It is important: Don’t transfer existing policies to the trust unless you are sure you are going to be at least three more years. Otherwise, the IRS will pull it back to your taxable property.
- Notify the beneficiary (Crummey’s note) – When you put your money into a trust, the beneficiary is technically entitled to withdraw it. The trustee must issue a “crummey notice” (named after the taxpayer’s timing and interesting last name). The beneficiaries usually don’t take the money, but the IRS needs this step to keep the trust legal.
- Trust pay premiums – After the notice period is passed (usually 30-60 days), the trustee uses cash to pay the policy premium.
- Death benefits provide liquidity – When you die, ILIT collects the benefits of death. The trustee can then decide how the funds are used: provide liquidity to the estate to pay taxes, support the heirs or both.
For example, ILIT may refer to your spouse as a primary beneficiary and your child as a secondary beneficiary. This way your spouse can take care of your spouse and when your spouse passes later, anything left of your child is exempt from estate tax. Smart stratification.
Trap and warning stories
Like most good things in finance, the Ilitus comes with warnings:
- Forgot the crummey notification, you are just toasting. A lawyer recalled a client who tried to use a laser printer to back-notify, except that the notification was predated by the invention of the laser printer. The IRS was not impressed. Result: Ilit is invalid and the assets are dragged back to tax inheritance. Ouch.
- Beware of oversized policies. If your real estate plan shows you only need $10 million, don’t let life insurance salesmen talk about $40 million coverage. Permanent life insurance is expensive and excess premiums can waste your liquidity.
- The Ilitus works best in permanent life insurance. Lifetime policies usually expire before estate tax is paid. However, the premiums for permanent policies (whole, universal, etc.) are high. You have to weigh whether the coverage is worth it.
- Tax laws change. Although the A Large Bill Act passed the A Large Bill Act on July 4, 2025, the $13.99 million exemption per person today may not last. If the exemption is reduced to about $5 million, more families will be affected. Still, if your net worth is likely to grow, it makes sense to plan with ILIT.
- No kickbacks. Once you lock your money in iLit, it disappears forever. Some families regret it when it becomes difficult to set one. Or maybe you decide to actively destroy wealth through yolo and give enough charities to the point where you die you end up in a difficult situation under the estate tax threshold.
Ilit is like a pressure relief valve
Real estate tax is often called “the problem of the rich.” But it’s the reality: real estate appreciation, stock market growth and business success can bring families into taxable territory faster than they expected.
For Yamamotos, who rides a $50 million legacy, the IRS cuts are close to $9 million. ilit is like a pressure valve. It eliminates uncertainty and panic by ensuring there is cash to pay Sam without removing the family estate.
Is this perfect? no. It requires discipline, planning, and often requires some substantial life insurance premiums. But for families who want to avoid forced shooting and keep their wealth intact for generations, it is one of the most practical real estate planning tools out there.
As with all things, the earlier you plan, the more options you have. Don’t wait until your 78-year-old estate executor stares at the bucket of millions of dollars in tax bills. Talk to a real estate lawyer, run the numbers and see if it’s right for your plan.
Because if you don’t, the IRS may end up being your biggest heir and they won’t even send a thank you letter.
Reader’s questions and suggestions
Reader, did any of you set ilit in irrevocable trust? If so, how easy is it to create, do you think it’s worth it? If you are considering one, be sure to consult a real estate planning lawyer as I am not one. Make sure at least you have a death file, a revocable life trust or at least one will. Since death is inevitable, we have to plan ahead so that after we leave, our heirs will not rush to the forefront.
You can check out Policy Genice Free custom quotes. My wife and I both got a 20-year life insurance policy for an affordable price. The monthly premium we pay is worth it for inner peace alone. With two young children and the remaining mortgage, owning life insurance is a non-negotiable part of our real estate planning.
