Advanced Markets Archives - Page 2 of 6

Gifting to Fund Life Insurance Premiums: Why the Gift Rules Matter

September 26, 2026November 30, 2021 by Tim Fuller

Advisor and client reviewing an advanced markets estate planning strategy in a private office

It is rarely hard to show clients they need life insurance. Finding the premium dollars is the harder part. Gifting can solve that problem, and understanding the basic gift rules helps you design cases that work for clients and their families.

Key takeaways

Gifts of cash to an adult child or a trust can fund a policy on the giver while keeping the death benefit out of the giver’s taxable estate.
Annual exclusion gifts and the lifetime exemption, now $15 million per person, give most clients ample room to fund premiums.
Gifting can also equalize an estate when some heirs inherit property and others do not.

When the giver dies, the child receives a tax-free death benefit that can replace the support the parent used to provide.

Why advisors need to know the gift rules

Gifting shows up in many advanced markets cases, from ILIT funding to split-dollar and family business planning. It creates opportunities, but it can also create complications, such as unexpected gift tax filings, if a case is structured carelessly. A working knowledge of the rules lets you spot the opportunity and avoid the trap. For a broader overview, see our article on lifetime gifting strategies.

How gifts fund life insurance

The mechanics are simple. A client gives cash to an adult child or to an irrevocable trust. The child or trustee applies for and owns a policy on the client’s life and uses the gifted cash to pay premiums. At the client’s death, the death benefit is paid to the owner-beneficiary income-tax-free and, because the client never owned the policy, it generally stays out of the client’s estate.

Gifts up to the annual exclusion amount per recipient generally require no gift tax return.
Larger gifts use part of the client’s lifetime exemption, which is $15 million per person from 2026 under the One Big Beautiful Bill Act.
Gifts to a trust usually need Crummey withdrawal rights to qualify for the annual exclusion.

Example: equalizing an estate with a gift

A father has three children. Two want to keep real estate that has been in the family for generations. The third, Jill, has no interest in owning it. To keep things fair, the father gives Jill cash each year so she can buy a policy on his life. At his death, the real estate passes to the two children who want it, and Jill receives the death benefit. Because Jill owns the policy, the proceeds stay out of the father’s taxable estate. Our article on estate equalization explores this idea further.

Financial and emotional reasons to give

Some clients give to reduce a future estate tax. Many more give because they want to see their family benefit, help a child with a specific need or make sure support continues after they are gone. Life insurance multiplies the value of those gifts. Contact SRS for help designing gift-funded cases and comparing carriers.

Frequently asked questions

Does a child need an insurable interest to own a policy on a parent?

Yes, and close family members generally have one. The parent must also consent to the coverage and take part in underwriting.

Should the policy be owned by the child or by a trust?

A trust adds control, creditor protection and clear distribution terms, which matter for larger policies or multiple heirs. Direct ownership by an adult child is simpler for smaller cases.

Does paying premiums through gifts require a gift tax return?

Not if the gifts fall within the annual exclusion and qualify as present-interest gifts. Larger gifts, or gifts to trusts without proper withdrawal rights, may require a return.

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Reviewed by Tim Fuller on 2026-09-26

Tim Fuller

President, SRS Inc.

Tim leads SRS Inc., a full-service IMO (Independent Marketing Organization) and BGA (Brokerage General Agency), connecting independent financial professionals with life, annuity, disability income, and long-term care solutions from 60+ carrier partners.

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Transfer-for-Value Risk in Cross-Purchase Buy-Sell Agreements

September 26, 2026November 24, 2021 by Tim Fuller

A cross-purchase buy-sell funded with life insurance can be inexpensive to set up and fund. But when there are three or more owners, the first death can move policy ownership in a way that exposes the survivors to transfer-for-value tax on the next death benefit.

Key takeaways

When jointly owned buy-sell policies change hands after an owner’s death, the transfer can violate the transfer-for-value rule.
A violation can make part of the death benefit taxable income to the new owner.
A planned ownership reset after the first death, reviewed by a tax advisor, can often solve the problem at lower cost than restructuring up front.

The shift in policy ownership caused by the first death is probably a transfer for value, and a large part of the next death benefit could become taxable.

How the problem arises

Consider three young, healthy owners, Sharon, Caroline and Andrea, who run an LLC taxed as an S corporation. They agree to buy out any owner’s estate for $1,000,000, and each is insured for that amount. The two non-insured owners jointly own each policy. Sharon and Caroline, for example, own the policy on Andrea.

If Andrea dies, her policy funds the purchase of her interest. But her share of the two remaining policies passes to the survivors, so Sharon becomes sole owner of the policy on Caroline and vice versa. That change in ownership for value is likely a transfer for value, which can cause the death benefit, less the new owner’s basis, to become taxable income.

The exceptions and why they may not help here

Transfers to the insured, to a partner of the insured, to a partnership in which the insured is a partner or to a corporation in which the insured is a shareholder or officer are exceptions. The most common fix is a partner-to-partner transfer. But these owners are taxed as an S corporation, and co-shareholders are not an exception. Converting to partnership taxation, or forming a separate partnership just to hold the policies, may cost far more than the annual premium, all to prevent a tax that only arises if a second death occurs while they are still in business.

A practical approach: plan the reset

A reasonable approach is to document, with the client’s tax advisor, a plan to reset ownership if a first death occurs:

Transfer each remaining policy back to its insured, an exception that also cleanses the policy of prior transfer-for-value taint.
Form a partnership between the surviving owners, incurring the cost only when it is actually needed.
Have the owners exchange policies so each owns the policy on the other, now protected by the partner exception.

Put the recommendation in writing for the client and their tax advisor, and keep a copy in your file to show the issue was raised. Our article on cross-purchase buy-sell agreements covers the broader design.

What about entity redemption?

Having the business own the policies avoids multiple cross-owned contracts. After Connelly v. United States (2024), however, company-owned life insurance used to redeem a deceased owner’s shares can increase the company’s value for estate tax purposes. Each structure has trade-offs, and SRS can help you and the client’s advisors compare them.

Frequently asked questions

What is the transfer-for-value rule?

If a life insurance policy is transferred for valuable consideration, the death benefit can become taxable income to the new owner, less what they paid and later premiums, unless an exception applies.

Are S corporation shareholders covered by the partner exception?

No. Co-shareholders are not an exception. A transfer to the corporation itself, or to the insured, can qualify.

Does a trusteed cross-purchase avoid the issue?

It can simplify ownership with many owners, but the trust arrangement must be carefully drafted. The client’s attorney should review how transfers are handled after a death.

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Reviewed by Tim Fuller on 2026-09-26

Tim Fuller

President, SRS Inc.

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Social Security Maximization: Turning Unneeded Benefits Into a Legacy

September 26, 2026November 24, 2021 by Tim Fuller

Some affluent clients at or near retirement collect Social Security benefits they do not need to live on. Instead of letting those payments pile up in a checking account, they can redirect them into life insurance and turn a modest income stream into a meaningful legacy.

Key takeaways

Unneeded Social Security income can be gifted to an ILIT to pay premiums on survivorship or single-life coverage.
In one case, a couple’s net Social Security income of about $14,000 a year funded a survivorship policy of roughly $973,000.
The strategy works best for insurable clients whose retirement income is already covered by other sources.

A couple netting about $14,000 a year in Social Security they didn’t need used it to fund nearly $1 million of survivorship coverage for their heirs.

Who this strategy fits

Clients at or past Social Security claiming age with other income sources covering their lifestyle
Couples who want to leave more to children or grandchildren
Clients in reasonable health who can qualify for competitive rates
Families interested in a trust-based legacy plan

It often pairs well with other income clients do not need, such as required minimum distributions. See our article on using RMDs in life insurance sales.

Case study: a couple redirects $14,000 a year

A 69-year-old man and his 65-year-old wife were receiving a combined $24,000 a year from Social Security that they did not need. After taxes, they were netting about $14,000.

After meeting with their advisor, they chose to gift $14,000 a year to an irrevocable life insurance trust. The trust purchased a survivorship universal life policy with a death benefit of about $973,000, payable to the trust for their children and grandchildren.

Premiums and death benefits depend on ages, health, product and current pricing, so any new case should be illustrated with today’s rates.

How the structure works

The clients continue collecting Social Security as usual.
Each year they gift the net amount to an ILIT, typically within annual exclusion limits.
The trustee pays the policy premium.
At the second death, the trust receives the death benefit income-tax-free and distributes it under the trust terms.

Survivorship coverage is often a cost-effective choice for married couples because it insures two lives and pays at the second death. For more on gift planning, see our article on lifetime gifting.

Presenting the choice to clients

For many clients the decision is simple: let unneeded income sit, or use it to build a lasting legacy. Our case design team can run survivorship and single-life illustrations so you can show clients exactly what their benefit could buy.

Frequently asked questions

Is Social Security income taxable?

Up to 85% of benefits can be subject to federal income tax depending on the client’s other income. The strategy typically uses the after-tax amount to fund premiums.

Why use survivorship life insurance?

It insures two people and pays at the second death, which often lines up with when an estate passes to heirs. It is usually less expensive than two separate policies.

Does the policy have to be owned by an ILIT?

No, but a trust keeps the death benefit out of the taxable estate and lets the clients set terms for how heirs receive the money.

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Reviewed by Tim Fuller on 2026-09-26

Tim Fuller

President, SRS Inc.

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Key Person Insurance for Sales Leaders and Rainmakers

September 26, 2026November 9, 2021 by Tim Fuller

In many businesses, a small number of people bring in a large share of the revenue. When a top salesperson, rainmaker or influential advisor to the company dies, the loss can hit the income statement immediately. Key person insurance on these people protects the business while it replaces relationships that took years to build.

Key takeaways

Rainmakers and sales leaders are often more financially important than their title suggests, because revenue follows their relationships.
Carriers typically justify key person coverage using a multiple of compensation, supported by evidence of the person’s contribution to revenue.
Even non-employee directors can sometimes qualify for modest coverage when their economic impact is well documented.

When a rainmaker dies, the business loses more than an employee; it loses the relationships that drive its revenue.

Why rainmakers deserve their own analysis

A sales leader’s value is tied to client relationships, referral networks and team leadership. Losing that person can mean lost accounts, delayed deals and the cost of recruiting and training a replacement, often at higher pay. Owners tend to insure themselves first and overlook the people who actually drive sales. For the basics, see our article on key person coverage.

Justifying the amount

Carriers commonly look at a multiple of total compensation, often up to about ten times, as a starting point. For rainmakers, a strong case adds:

The share of revenue or gross profit tied to the person’s book of business
Commission and bonus history, not just base salary
Estimated cost and time to recruit and ramp up a replacement
A cover letter explaining the person’s role and impact

A clear story matters. Our article on writing underwriting cover letters shows how to present it.

An unusual case: outside directors

Sometimes a company’s most important signal-caller is not on the payroll. A board member or outside advisor may shape strategy, open doors or lend industry credibility. Carriers do not traditionally recognize these people for key person purposes because they are not employees and have little or no compensation to apply a multiple to.

In one case, however, our team helped a carrier consider modest coverage of $250,000 on directors. Their contributions to the company were well documented, they received meaningful compensation ($2,000 a year plus $1,000 per meeting) and the company was also insuring its traditional key people under standard guidelines. That small success also opened the door to personal planning for two of the key people.

Structuring and compliance

The business applies for, owns and is beneficiary of the policy.
For employer-owned coverage, satisfy Section 101(j) notice and consent requirements before issue so the death benefit remains income-tax-free, and file Form 8925 annually.
Revisit coverage as the person’s production and compensation change.

Contact SRS to discuss key person cases, especially those outside common guidelines.

Frequently asked questions

How much key person insurance can a business buy on a salesperson?

Carriers often use a multiple of total compensation, commonly up to about ten times, supported by evidence of the person’s contribution to revenue. Each carrier has its own guidelines.

Can a company insure a director who isn’t an employee?

Sometimes. Carriers are cautious, but modest amounts may be possible when the director is compensated and their economic value is well documented.

Is key person insurance tax-deductible?

Premiums are generally not deductible when the business is the beneficiary. The death benefit is generally income-tax-free if Section 101(j) requirements are met.

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Reviewed by Tim Fuller on 2026-09-26

Tim Fuller

President, SRS Inc.

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Executive Bonus With Cost Recovery: Pairing a Bonus Plan With Loan Split Dollar

September 26, 2026October 26, 2021 by Tim Fuller

Executive bonus plans are simple, which is why employers like them. Their weakness is that once the premium is paid, the money is gone, even if the executive walks out the door next year. A loan-regime split dollar design can keep the simplicity of a bonus plan while giving the employer a way to recover its outlay.

Key takeaways

A standard executive bonus plan gives the employer no way to recover premiums if the executive leaves early.
Structuring premiums as loans under a split dollar agreement, secured by a collateral assignment, lets the employer recover funds on early departure.
As the loan is forgiven on a vesting-like schedule, the arrangement gradually becomes a plain executive bonus plan.

The loan is forgiven in steps; once it reaches zero, the collateral assignment is released and you are back to a plain executive bonus arrangement.

The problem with a plain executive bonus plan

Of the common nonqualified benefit arrangements that involve life insurance (deferred compensation, split dollar and executive bonus), the executive bonus plan is usually the easiest. The executive owns the policy, the employer pays the premium, and the payment is reported each year as taxable compensation to the executive and is generally deductible to the employer.

The catch is control. Once the bonus is paid, the employer has no claim on the policy. If the executive leaves early, the company has funded a benefit for someone who is no longer building its business. Many employers want some or all of their cost back in that situation.

How the cost-recovery design works

The fix is to combine the bonus concept with a loan-regime split dollar agreement:

Premiums are treated as loans. The employer pays premiums on the executive-owned policy, and each payment is documented as a loan to the executive.
The employer is secured. A collateral assignment of the policy protects the employer’s right to recover its money if the executive leaves before the agreed schedule is complete.
The executive reports imputed interest. Each year the executive recognizes income for the below-market interest on the loan, generally measured using the applicable federal rate (AFR). The employer can choose to bonus enough to cover that extra tax cost.
The loan is forgiven over time. On a vesting-like schedule set out in the agreement, portions of the loan are forgiven. Each forgiven amount is reported as income to the executive and is generally deductible by the employer, just as a bonus would be.

What happens as the plan matures

As the loan balance drops, so does the imputed interest the executive has to recognize. When the loan is fully forgiven, the collateral assignment is released and the executive owns the policy free and clear. At that point the arrangement looks exactly like a traditional executive bonus plan.

If the executive leaves early, the employer can recover the outstanding loan balance from the policy under the terms of the collateral assignment. That is the “golden handcuff” many business owners are looking for. For a related design aimed at family wealth transfer, see our overview of generational split dollar.

Is it right for your client?

This approach takes more paperwork than a plain bonus plan, and the executive carries a modest extra tax cost for the imputed interest. It tends to fit employers who:

Want to reward and retain a key executive with permanent life insurance
Are uncomfortable giving up all control of premium dollars on day one
Prefer a clear, written schedule that shows the executive exactly when the benefit becomes theirs

The agreement, the loan documentation and the tax reporting should be prepared with the client’s legal and tax advisors. Contact us with your next executive benefit case and our team will help you design a plan that protects the employer without a lot of fuss.

Frequently asked questions

What is an executive bonus plan with cost recovery?

It is an arrangement where the employer pays premiums on an executive-owned life insurance policy as loans under a split dollar agreement. The loans are forgiven over a vesting-like schedule, and the employer can recover the unforgiven balance if the executive leaves early.

How is the executive taxed under a loan-regime split dollar plan?

The executive generally recognizes imputed interest income on the outstanding loan each year, based on the applicable federal rate, and recognizes compensation income as portions of the loan are forgiven. The employer may bonus the extra tax cost.

What happens when the loan is fully forgiven?

The collateral assignment is released and the executive owns the policy outright. From that point it works like a traditional executive bonus arrangement.

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Reviewed by Tim Fuller on 2026-09-26

Tim Fuller

President, SRS Inc.

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Beneficiary Designations for Minor Children: Trusts vs. UTMA Custodianships

September 26, 2026October 19, 2021 by Tim Fuller

The beneficiary designation is one of the most important parts of a life insurance application, and one of the easiest to get wrong. When minor children could end up receiving the death benefit, a few extra minutes of planning can save the family a costly court process.

Key takeaways

Minors cannot legally receive life insurance proceeds directly, so a court-appointed guardian may be required if a child is named without a plan.
A trust offers the most control over how and when children receive the money.
A custodianship under the state’s Uniform Transfers to Minors Act (UTMA) is a simpler, low-cost alternative when a trust isn’t in place.

There should never be a contingency that results in an underage beneficiary receiving life insurance proceeds outright.

Why the beneficiary box is a trap

The beneficiary space on most applications is small. That encourages clients to keep their instructions short and tempts busy advisors to skip a fuller designation on a separate page. When children are involved, a short designation can create big problems.

Minors are not legally able to accept death proceeds. The age of majority varies by state. If a minor becomes the beneficiary, directly or as a contingent beneficiary, a guardian of the child’s property may need to be appointed through the courts, a process that takes time and money and may not put the person the insured would have chosen in charge.

Option 1: Name a trust

The strongest solution is to name a trust as beneficiary. The trustee holds and manages the proceeds for the children and distributes them according to the insured’s written instructions, whether that is paying for education, making staged distributions at certain ages, or holding funds longer for a child who needs more time.

The hurdle is getting the client to have a trust drafted, even when the size of the death benefit clearly justifies the cost. If the family has larger estate planning goals, an irrevocable or grantor trust may be worth discussing with their attorney.

Option 2: A UTMA custodianship designation

Nearly every state has adopted a version of the Uniform Transfers to Minors Act. It lets a beneficiary designation name a custodian to receive proceeds for the benefit of a minor, with no separate trust document required. Think of it as a basic trust created by state law.

There are trade-offs compared with a trust:

The custodian’s duties are set by statute, which may be less flexible than the insured would like.
The child receives the remaining funds at the age set by state law, often 18 or 21, which may be younger than the parents would prefer.

Not perfect, but far better than leaving the proceeds to a court-supervised guardianship.

Getting the wording right

UTMA designations can be tricky. Despite the word “uniform,” states differ in what they require, and carriers differ in the wording they will accept. Good practice includes:

A separate, complete designation for each minor child
Naming successor custodians in case the first choice cannot serve
Using a separate sheet rather than squeezing instructions into the application box
Confirming the carrier’s preferred language before submitting

Contact us for help drafting any ownership or beneficiary designation, especially one that creates a custodianship for a minor.

Frequently asked questions

Can a minor be the beneficiary of a life insurance policy?

A minor can be named, but cannot legally receive the proceeds directly. Without a trust or custodianship in place, a court may need to appoint a guardian to manage the money until the child reaches the age of majority.

What is a UTMA beneficiary designation?

It names a custodian to receive life insurance proceeds on behalf of a minor under the state’s Uniform Transfers to Minors Act. The custodian manages the funds under state law and turns them over to the child at the age the statute sets.

Is a trust better than a UTMA custodianship?

A trust usually offers more control over how and when children receive the money, while a UTMA custodianship is simpler and cheaper to set up. The right choice depends on the size of the benefit and the family’s goals.

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Reviewed by Tim Fuller on 2026-09-26

Tim Fuller

President, SRS Inc.

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Trust-Owned Life Insurance: Keeping Flexibility With Substitution Powers

September 26, 2026October 12, 2021 by Tim Fuller

Irrevocable trusts are the standard home for life insurance bought to cover estate taxes. But clients often worry about locking a valuable policy away for good. A properly drafted grantor trust can keep the door open to reacquire the policy later without pulling the death benefit back into the estate.

Key takeaways

Life insurance held in an irrevocable trust is generally kept out of the insured’s taxable estate.
Under Rev. Rul. 2011-28, a grantor’s power to reacquire a policy by substituting assets of equal value is not, by itself, an incident of ownership, when proper safeguards are in place.
A policy bought back from a grantor trust can often be sold back later without triggering the three-year rule or a transfer-for-value problem.

Rev. Rul. 2011-28 confirmed that a grantor’s substitution power, properly limited, does not cause estate inclusion of a trust-owned policy.

The standard ILIT strategy

Wealthy clients who expect an estate tax bill often buy life insurance inside an irrevocable life insurance trust (ILIT). They make gifts to the trust so the trustee can pay premiums, using annual exclusions or lifetime exemption to shelter the gifts. At death, the proceeds are outside the taxable estate and can provide liquidity to pay taxes. With the federal exemption now at $15 million per person, see our overview of what the $15M exemption means for planning.

The concern is what happens if the client later needs the policy back, for example as collateral for a business loan after health changes make new coverage hard to get.

What Rev. Rul. 2011-28 says

Many grantor trusts give the grantor a power to reacquire trust property by substituting other assets of equal value. Advisors once worried that this power, applied to a life insurance policy, might be an “incident of ownership” that would pull the death benefit back into the estate even if never used.

In Rev. Rul. 2011-28, the IRS concluded it is not an incident of ownership, provided that:

The trustee has a fiduciary duty to ensure the substituted assets are of equivalent value, and
The power cannot be exercised in a way that shifts benefits among trust beneficiaries.

Clients should confirm with their legal and tax advisors that their trust document meets these conditions.

Moving a policy out and back in

This flexibility can go both ways. Suppose a client reacquires a policy to use as loan collateral. Once the loan is repaid, the client may be able to sell the policy back to the grantor trust. Done properly:

The three-year rule for gifted policies generally doesn’t apply, because the policy is sold for full value rather than gifted.
Transfer-for-value is generally not an issue, because a sale to a grantor trust is treated for income tax purposes as a transfer to the grantor.

For more on why grantor trusts are so useful here, see our post on grantor trusts in life insurance planning.

Putting it to work

For clients hesitant about irrevocable planning, knowing there is a well-established way to get the policy back if needed can make the decision easier. Contact us if a client is weighing trust-owned coverage or the sale of an existing policy to a trust, and we can help you coordinate with their attorney.

Frequently asked questions

Can a grantor get a life insurance policy back out of an irrevocable trust?

Often yes, if the trust grants a power to reacquire assets by substituting property of equal value. Rev. Rul. 2011-28 held this power does not cause estate inclusion when the trustee must ensure equivalent value and benefits can’t be shifted among beneficiaries.

Does selling a policy to a grantor trust trigger the three-year rule?

The three-year look-back generally applies to gifts of life insurance. A bona fide sale for full value is generally not subject to it, though clients should confirm with their tax advisor.

Is a sale of a policy to a grantor trust a transfer for value?

Generally no. For income tax purposes, a sale to the insured’s own grantor trust is treated as a transfer to the insured, which is an exception to the transfer-for-value rule.

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Reviewed by Tim Fuller on 2026-09-26

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President, SRS Inc.

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Special Needs Planning With Life Insurance: Funding a Special Needs Trust

September 26, 2026October 11, 2021 by Tim Fuller

Parents and caregivers of a family member with special needs often share one worry: who will provide for their loved one when they’re gone? A special needs trust funded with life insurance can create lasting resources without putting critical government benefits at risk.

Key takeaways

A special needs trust (SNT) can hold assets for a person with a disability while helping preserve eligibility for means-tested programs such as SSI and Medicaid.
Life insurance is a natural funding source because it creates a known sum exactly when the caregiver is no longer there.
These cases often involve the whole family, opening the door to broader planning.

Life insurance delivers funding to the special needs trust at the moment it is needed most: when the parent or caregiver is gone.

Why a special needs trust matters

Many people with disabilities rely on means-tested government programs such as Supplemental Security Income (SSI) and Medicaid. Leaving money to them directly can disqualify them from those benefits. A properly drafted third-party special needs trust holds assets for their benefit and can pay for extras that improve quality of life, while being designed to avoid counting against eligibility.

The trust needs to be drafted by an attorney experienced in special needs planning, and the trustee must follow the rules on how distributions are made.

How life insurance fits

The biggest challenge is funding. Parents may not have enough assets to support a loved one for a lifetime. Life insurance solves that by creating a known amount, delivered to the trust at the parent’s death. Common designs include:

A guaranteed universal life policy owned by or payable to the trust for lifetime protection
Survivorship (second-to-die) coverage when the goal is to fund care after both parents are gone
Premiums funded by annual exclusion gifts; see our overview of gifting strategies

Beneficiary designations of other family members and relatives should be coordinated so no one accidentally leaves assets directly to the person with special needs.

Planning for the whole family

Special needs planning rarely stops at one policy. Families also need to think about guardianship, a letter of intent describing the loved one’s routines and care, retirement planning for the parents, and fair treatment of siblings. ABLE accounts can also play a supporting role for eligible individuals. Each conversation is a chance to serve the family more completely.

An opportunity to serve

Families caring for a loved one with special needs are often stretched thin and don’t have time to research their options. An advisor who brings a clear plan and a trusted network of attorneys can make a real difference. Contact us to talk through case design and carrier options for your next special needs case.

Frequently asked questions

What is a special needs trust?

It is a trust that holds assets for a person with a disability, designed so the assets generally don’t count against eligibility for means-tested benefits like SSI and Medicaid. The trustee uses the funds to supplement, not replace, those benefits.

Why use life insurance to fund a special needs trust?

Life insurance creates a known sum paid to the trust when the parent or caregiver dies, which is exactly when the loved one will need support the most.

Should the person with special needs be named directly as beneficiary?

Generally not. Leaving assets directly to someone who relies on means-tested benefits can affect eligibility. Naming the special needs trust as beneficiary is usually the better approach, with guidance from an experienced attorney.

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Reviewed by Tim Fuller on 2026-09-26

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President, SRS Inc.

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Family LLCs and Valuation Discounts: Still a Powerful Gifting Tool

September 25, 2026October 5, 2021 by Tim Fuller

Parents who want to pass wealth to children often worry about handing over control too soon. A family LLC solves that, and it can also make every dollar of gift exemption go further through valuation discounts.

Key takeaways

A family LLC with voting and non-voting interests lets parents gift ownership while keeping control of the assets.
Non-voting, non-marketable interests can often be valued at a discount, so more value passes per dollar of exemption used.
2021 proposals to eliminate discounts on passive assets were not enacted; discounts remain available but require a qualified appraisal and careful structure.

Gift 50% of a $1 million LLC with a 25% valuation discount, and the reportable gift is $375,000 — not $500,000.

How a family LLC works

The family consolidates assets in an LLC with two classes of interest: voting (often 1–2%) and non-voting (the rest). Parents gift non-voting interests to children, using annual exclusions or lifetime exemption. Growth on the gifted interests happens outside the parents’ estate, while parents keep all voting control. If income allocations to the parents fall, a reasonable management salary can help.

How valuation discounts work

An interest with no vote and no ready market is worth less than its proportionate share of the underlying assets. So a 50% non-voting interest in a $1 million company might be appraised at a 25% discount, making the gift $375,000 instead of $500,000. The discount must be supported by a qualified appraisal and a real business purpose.

Current status

In 2021, the Build Back Better proposal would have disallowed discounts on transfers of “non-business” passive assets, such as marketable securities, held in a family entity. That provision was not enacted. Discounts remain available, but the IRS scrutinizes them, especially on entities holding mostly passive investments, so structure and documentation matter.

Where life insurance fits

With the federal exemption now $15 million per person, family LLCs are most relevant for larger estates and for clients who want to shift future growth out of the estate. Life insurance, often owned by an irrevocable trust, can provide liquidity for any remaining estate tax and equalize inheritances. See gifting strategies under the permanent $15 million exemption.

Frequently asked questions

What is a family LLC?

A limited liability company that holds family assets, typically with voting interests kept by parents and non-voting interests gifted to children.

Are valuation discounts for family LLCs still allowed?

Yes. Proposals in 2021 to limit them were not enacted, but discounts must be supported by a qualified appraisal and are closely reviewed by the IRS.

How big are family LLC discounts?

It depends on the assets and structure; the appraisal determines it. The example in this article uses a 25% discount for illustration.

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Reviewed by Tim Fuller on 2026-09-25

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Gifting Strategies Under the Permanent $15 Million Exemption

September 25, 2026October 4, 2021 by Tim Fuller

In 2021, advisors were racing to help clients use their exemption before it shrank. That urgency is gone: the exemption is now $15 million per person and no longer scheduled to drop. The planning question has shifted from “how fast” to “what’s the smartest way to use it.”

Key takeaways

The federal gift and estate exemption is $15 million per person from 2026, with no scheduled sunset.
Lifetime gifts move future appreciation out of the estate, but heirs inherit the donor’s income tax basis rather than a step-up.
Life insurance premiums gifted to an irrevocable trust can multiply the value of exemption and annual exclusion gifts.

Gifts shift future growth out of the estate — but gifted assets keep the donor’s basis. Give low-gain assets; keep highly appreciated ones for the step-up at death.

What changed since 2021

Back then, proposals would have cut the exemption early, and the 2017 law’s increase was scheduled to expire at the end of 2025. Neither happened as feared: the One Big Beautiful Bill Act set a permanent $15 million per-person exemption from 2026. See what the permanent exemption means.

Considerations before making large gifts

Control: clients may be uneasy giving away large amounts outright. A family LLC lets them gift non-voting interests while keeping control.
Basis: recipients take the donor’s income tax basis. Gift assets with little built-in gain, and leave highly appreciated assets to pass at death with a step-up.
Married couples: each spouse has an exemption. Consider which spouse’s exemption to use first, and watch community property rules when retitling assets.
Future law changes: “permanent” means no scheduled sunset, not immunity from future legislation. Using exemption now locks in the benefit.

Where life insurance adds leverage

Gifts to an irrevocable life insurance trust (ILIT) used to pay premiums can turn a modest annual gift into a much larger, income-tax-free death benefit outside the estate. Premium gifts can often be covered by the annual exclusion ($19,000 per recipient in 2025) using Crummey withdrawal powers, preserving lifetime exemption for other planning. For larger single-premium designs, part of the lifetime exemption can be used.

Frequently asked questions

How much can I gift without paying gift tax in 2026?

Each person can give up to $15 million over their lifetime free of federal gift tax, in addition to annual exclusion gifts to each recipient.

Is it better to gift assets now or leave them at death?

It depends. Gifting removes future growth from the estate, but assets left at death generally get a step-up in basis. Low-gain assets are often better gifts.

How does life insurance fit into lifetime gifting?

Gifts to an irrevocable trust can pay premiums on a policy whose death benefit passes outside the estate, multiplying the value of the gift.

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Reviewed by Tim Fuller on 2026-09-25

Tim Fuller

President, SRS Inc.

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