Beyond the Basics: Taking Irrevocable Life Insurance Trust Planning to the Next Level

In our last post, we went back to basics on how life insurance in an Irrevocable Life Insurance Trust (ILIT) works, from setup to operation to what happens at death.

Now let’s go further and explore how this familiar structure evolves in the hands of experienced families and their advisors. Because while the ILIT’s foundation is simple, what you can build on top of it is remarkably powerful.

The Modern ILIT: From Static Structure to Strategic Engine

Early ILITs were straightforward. They involved a single policy, a few annual gifts, and a payout at death to cover estate taxes.

Today’s ILITs are far more dynamic. They’re designed not only to pay taxes but to build and preserve wealth for spouses, children, grandchildren, and future generations.

Modern ILITs can:

• Integrate with dynasty trust planning, keeping assets protected and tax-efficient for decades.

• Coordinate with spousal access planning, allowing couples to retain indirect benefits during life.

• Hold flexible investment-based life insurance policies, such as Private Placement Life Insurance (PPLI), that align with broader investment and tax strategies.

The ILIT is no longer a static “parking lot” for a policy. It’s an active component of a family’s long-term financial architecture.

Solving the “Loss of Access” Problem in SLATS

In an earlier post, we highlighted a recurring issue in Spousal Lifetime Access Trust (SLAT) planning. What happens when one spouse dies and the surviving spouse loses access to the deceased’s trust assets.

The solution doesn’t require a separate ILIT. Each spouse’s existing SLAT can purchase a life insurance policy on the other’s life, using the trust already in place to maintain liquidity and balance.

Here’s how it works:

• Each SLAT owns and pays premiums on a policy insuring the other spouse.

• When one spouse passes, that SLAT continues for the children or other beneficiaries.

• The surviving spouse’s SLAT receives the insurance death benefit tax-free, effectively replacing the “lost access.”

It’s elegant, coordinated, and preserves liquidity precisely when it’s needed most. And for single clients, siblings, or business partners, the same principle applies. The irrevocable trust itself can own insurance to provide liquidity, equalization, or value replacement when one party dies.

Generation-Skipping and Dynasty ILITs

For ultra-high-net-worth families, estate planning doesn't stop at the next generation. By combining ILITs with generation-skipping transfer (GST) tax planning, families can use their lifetime GST exemption to create "dynasty ILITs," trusts designed to last for multiple generations.

These trusts can own life insurance policies that grow outside of any individual's estate, ensuring that the proceeds remain protected from both estate tax and creditors for generations to come. Families often structure these with waterfall distribution provisions, similar to strategies employed by multi-generational wealth families like the Rockefellers, ensuring that assets flow systematically through generations while maintaining protection and tax efficiency.

In states that allow long-term or perpetual trusts (like South Dakota, Delaware, or Nevada), dynasty ILITs have become a cornerstone of modern legacy design.

Premium Financing Inside an ILIT

As we noted in a recent post ,renewed buzz around financing strategies has accompanied the expectation of lower interest rates.

When executed thoughtfully, premium financing allows clients to secure substantial coverage for estate liquidity without tying up millions in cash. The ILIT borrows from a bank to pay premiums, using the policy’s cash value and death benefit as collateral. The grantor typically gifts cash to cover annual loan interest, and at death, the proceeds repay the loan, leaving the remainder estate-tax-free.

When constructed with that rigor, financing offers two key advantages:

• Scale: meeting liquidity needs tied to estate taxes, business succession, or wealth transfer.

• Preservation: maintaining liquidity for families who prefer not to make large, irreversible gifts before the 2025 exemption sunset.

It’s a tool, not a shortcut. A tool that demands ongoing collaboration between your trust, your bank, and your advisory team.

The PPLI or PPVA ILIT

For families with significant investable assets, the ILIT can serve as the owner of a Private Placement Life Insurance (PPLI) or Private Placement Variable Annuity (PPVA) policy.

Unlike traditional policies that use fixed or indexed subaccounts, PPLI and PPVA policies allow for customized investment strategies, often including hedge-fund-like or private credit exposures, within a tax-deferred (or tax-free, at death) structure.

When held inside an ILIT, these policies combine:

• Income-tax efficiency (via the insurance wrapper), and

• Estate-tax exclusion (via the trust structure).

It’s a double layer of tax optimization, ideal for families who already invest through managed accounts or private funds and want to add a planning dimension to those dollars.

Coordinating with the Broader Estate Plan

An ILIT rarely stands alone. Its effectiveness depends on coordination with the rest of the estate plan, including wills, revocable trusts, SLATs, buy-sell agreements, and charitable structures.

Advisors often align ILITs with:

• Buy-sell arrangements for closely held businesses, providing liquidity for ownership transitions.

• Charitable remainder or lead trusts (CRTs/CLATs), using insurance to “replace” wealth given to charity.

• Family limited partnerships (FLPs) or LLCs, where distributions can help fund ILIT premiums without large out-of-pocket gifts.

The most successful plans treat the ILIT not as an isolated vehicle but as part of an integrated wealth ecosystem.

When to Review (and When to Redesign)

Even well-built ILITs need maintenance. Laws change, tax exemptions sunset, and families evolve.

It’s smart to review your ILIT every few years to confirm:

• The policy is still performing as expected.

• The trustee understands and is meeting compliance obligations (like annual Crummey notices).

• The trust terms still reflect your current goals and family dynamics.

If not, it may be time for a redesign. For instance, decanting into a new trust under modern state law or integrating a spousal access feature.

The Takeaway

At its core, an ILIT remains about control, flexibility, and efficiency. About protecting assets from tax erosion while keeping family wealth coordinated and purposeful.

But today’s ILITs go further. They can fund dynasty trusts, integrate with private-market investments, and even solve liquidity challenges across generations.

It’s not merely about avoiding estate tax but building a structure strong enough to weather change, sustain family goals, and keep your wealth working for those you love, long after today’s planning window closes.

This content is for informational purposes only and does not constitute legal, tax, or financial advice. Clients should consult their professional advisors before implementing any strategy.