Strategy Snapshot: Gifts of Income-Producing Property to ILITs 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.
Current gifts of income-producing property can enable an irrevocable life insurance trust (ILIT) to pay future premiums without relying on future gifts from the insured grantor.
High-net-worth clients should consider giving sooner rather than later in order to use the gift exemption before it disappears.

Case Scenario

Married couple James (52) and Carol (53) have concerns about the potential impact of federal estate tax, as their net worth is $22 million and growing. Their portfolio includes income-producing investment real estate and nonqualified securities.

James and Carol have already created an ILIT, which owns a survivorship life insurance policy and other assets. They have each used approximately $2 million of their lifetime gift exemption for gifts to their beneficiaries. Currently they give $220,000 each year to the trust to cover the premium due for that year.

Their Goals

Allow trust assets to grow outside of James and Carol’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 beneficiaries over time as determined by the ILIT’s terms.

With a large estate
that contains varied assets,
it is important to consider the
impact of the possible sunset
of the TCJA. Now is the time to
craft a tax-efficient strategy.

A Possible Solution

Working with their estate planning attorney and their financial professional, James and Carol decide to increase the ILIT’s holdings by making larger gifts in the next three years. James and Carol will make gifts of income-producing investment real estate in 2025 of a combined $6 million. Income from the $6 million is expected to be approximately $300,000 per year.

Here's how this strategy will work:

James and Carol transfer ownership of $6 million of income-producing investment real estate to the ILIT in 2025.

The ILIT assets produce income of $300,000 each year.

The ILIT trustee uses some of the $300,000 annual income to pay premiums on the life insurance policy insuring James and Carol.

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

The grantors (James and Carol) will owe income tax on the trust’s taxable income since the trust is a grantor trust for income tax purposes.

At the deaths of both James and Carol, 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

James and Carol's gift of $6 million does not create gift tax, as it is within their remaining lifetime gift tax exemption.
James and Carol are responsible for income tax on any trust income, so the trust can use and invest its 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 either James or Carol’s gross estate.
Future annual exclusions no longer must be earmarked for insurance premiums, as the trust has its own source of funds with which to pay premiums.
The trust is projected to have enough income and principal to pay all future life insurance premiums.

Drawbacks

James and Carol will not own the $6 million of income-producing real estate any longer.
James and Carol will owe income tax on the trust’s income, though they will not have access to that income.
Assets in the trust will not get a step-up in basis at either grantor’s death.

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.

NOT A BANK OR CREDIT UNION DEPOSIT OR OBLIGATION • NOT FDIC OR NCUA INSURED • NOT INSURED BY ANY FEDERAL GOVERNMENT AGENCY • NOT GUARANTEED BY ANY BANK OR CREDIT UNION