Strategy Snapshot: Sizable Gifts Before the Sunset of TCJA May Enable an ILIT to Pay Future Life Insurance Premiums

Background

In 2026 the federal gift, estate, and generation-skipping transfer tax exemptions (currently $13,990,000 per individual), will change significantly, reverting to an estimated $7 million (as indexed for inflation).
Possible changes to estate and gift tax laws in 2025 can affect this situation and related planning recommendations.
High net worth clients should consider giving sooner rather than later to use the enhanced lifetime gift exemption before it disappears in 2026.
Pre-funding an irrevocable life insurance trust (ILIT) to pay future life insurance premiums with large current gifts can enable the trust to pay premiums without relying on future gifts from the insured grantor and without concern for potential future legislation restricting giving capacity.

Case Scenario

Married couple Amelia (55) and Zachary (55) have concerns about federal estate tax law changes that will occur in 2026, as their net worth is $35M and growing. Their portfolio includes income-producing investment real estate and nonqualified securities.

Amelia and Zachary have already created an ILIT to own life insurance and other assets. Currently they give $300k each year to the trust to cover the premiums due for that year on three life insurance policies (one survivorship and two single-life policies).

Upon advice of their personal estate planning attorney and financial professional, Amelia and Zachary decide to increase the ILIT’s holdings by making a large gift of their income-producing real estate in 2025.

Their Goals

Allow the trust assets to grow outside of Amelia and Zachary’s taxable estate.
Provide liquidity to the executor of the estate, if necessary, to pay estate taxes.
Control the management and distribution of trust assets to their children over time, as determined by the ILIT’s terms.

A growing estate
that contains mixed assets
could be a concern, and it is
important to understand the
impact of the possible sunset
of the TCJA tax relief.

A Possible Solution

Working with their personal estate planning attorney and their financial professional, Amelia and Zachary decide to increase the ILIT’s holdings by accelerating their gift giving plan — making larger gifts before 2026 instead of their usual smaller gifts over many years.

As part of the new plan, Zachary will make all the gifts (where before gifts were split between the spouses).

Zachary makes gifts in 2025 of a combined $10 million of income-producing real estate. Income from the $10 million is expected to be approximately $500,000 per year.

Zachary transfers ownership of $10 million of real estate and investments to the ILIT.

ILIT assets produce income each year of approximately $500,000.

The ILIT trustee uses $300,000 of its annual income to pay premiums on the life insurance policies insuring Amelia and Zachary.

The ILIT trustee reinvests remaining trust income in a balanced portfolio.

The grantors will owe income tax on the trust’s taxable income since the trust is a grantor trust for income tax purposes.

At the death of the survivor of Amelia and Zachary, the ILIT may buy assets from the estate using cash provided by the life insurance policy death benefit.

After the grantors' deaths, the ILIT holds or distributes assets to its beneficiaries, as determined by the provisions of the trust document.

Benefits & Drawbacks

Benefits

Zachary’s $10 million gift does not create gift tax. Had he alone made a similar gift in 2026 with a reduced lifetime gift tax exemption, a portion of the gift would have been subject to gift tax.
Amelia’s exemption amount has been preserved for future use.
The trust’s value grows faster since Amelia and Zachary are responsible for income taxes for any trust income.
The appreciation of the assets from the time of the gift will avoid transfer tax since the trust’s assets will not be included in the gross estate of either Amelia or Zachary.
Future annual exclusion gifts no longer must be earmarked for insurance premiums, as the trust has its own source of funds.
The trust is projected to have enough income and principal to pay all future life insurance premiums, either from income or from the value of the $10 million principal.

Drawbacks

Amelia and Zachary will not own the $10 million of assets any longer. They may not rescind the gifts to the trust nor receive any benefit from the trust assets or trust income.
Amelia and Zachary will include the trust’s taxable income on their personal income tax return. They will owe income tax on the trust's taxable income even though they will not have access to that income.

For more information, contact a MassMutual Financial Professional.

Additional Resources

Any examples provided are hypothetical and for illustrative purposes only. Examples include fictitious names and do not represent any particular person or entity.

The information provided is not written or intended as specific tax or legal advice. MassMutual, its subsidiaries, employees, and representatives are not authorized to give tax or legal advice. Individuals are encouraged to seek advice from their own tax or legal counsel. Individuals involved in the estate planning process should work with an estate planning team, including their own personal legal or tax counsel.

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