Advanced Markets Archives - Page 3 of 6

Selling Assets to an Intentionally Defective Grantor Trust: Where Life Insurance Fits

September 25, 2026October 1, 2021 by Tim Fuller

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

An intentionally defective grantor trust (IDGT) is one of the most effective tools for high-net-worth clients who want to move a growing asset out of their estate. It’s also a natural home for life insurance.

Key takeaways

An IDGT is outside the grantor’s estate for estate tax purposes but treated as the grantor for income tax purposes.
Because the grantor and trust are the same taxpayer, selling appreciated assets to the trust for a note generally triggers no capital gain, and note interest isn’t taxable income.
Life insurance can be transferred to a grantor trust without triggering the transfer-for-value rule, and can fund liquidity or repay the note.

Sell a growing asset to the trust for a note, and future appreciation above the note’s interest rate passes to heirs outside the estate.

Why the “defect” is intentional

Grantor trust rules were originally written to stop income shifting, when trusts were taxed at lower rates than individuals. Today trust tax brackets are highly compressed, so paying the trust’s taxes personally is usually preferable. Trusts are therefore deliberately drafted to be grantor trusts for income tax while remaining outside the estate. Proposals in 2021 to curb grantor trusts were not enacted.

How an installment sale works

The grantor makes a “seed” gift to the trust, often around 10% of the value of the asset to be sold.
The grantor sells an appreciating asset, such as business interests, to the trust for a promissory note at the IRS’s applicable federal rate.
Because the grantor and trust are one taxpayer, the sale generally doesn’t trigger capital gain, and interest payments aren’t taxable income to the grantor.
Growth above the note’s interest rate stays in the trust, outside the estate.

Where life insurance fits

Ownership: the trust can own life insurance on the grantor, keeping the death benefit outside the estate.
Transfer-for-value: transferring an existing policy to a grantor trust is generally treated as a transfer to the insured, an exception to the transfer-for-value rule. See how transfer-for-value can hurt a death benefit.
Liquidity: the death benefit can repay any outstanding note or provide cash for estate taxes.

Planning notes

Assets in the trust don’t receive a step-up in basis at the grantor’s death. The strategy requires careful drafting, a qualified appraisal, and ongoing administration, so it should always be designed with the client’s attorney and tax advisor. We can help model the life insurance piece. More on how grantor trusts work.

Frequently asked questions

What is an intentionally defective grantor trust?

An irrevocable trust drafted so its assets are outside the grantor’s estate, while the grantor is still treated as owner for income tax purposes.

Does selling assets to an IDGT trigger capital gains tax?

Generally no, because the grantor and the trust are treated as the same taxpayer for income tax purposes.

Can a life insurance policy be moved into a grantor trust?

Yes. A transfer to a grantor trust is generally treated as a transfer to the insured, an exception to the transfer-for-value rule.

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Reviewed by Tim Fuller on 2026-09-25

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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The Transfer-for-Value Rule: How to Avoid Turning Tax-Free Death Benefits Taxable

September 26, 2026September 28, 2021 by Tim Fuller

Life insurance death benefits are usually income tax-free, but a policy transferred for value can lose much of that advantage. Knowing the rule, its exceptions and how to fix a tainted policy helps advisors protect clients during ownership changes.

Key takeaways

If a policy is transferred for valuable consideration, the death benefit may be taxable except to the extent of the buyer’s basis.
Key exceptions include transfers to the insured, a partner of the insured, a partnership that includes the insured, or a corporation in which the insured is a shareholder or officer.
A policy tainted by a transfer for value can often be cleansed by a transfer back to the insured, since only the last transfer governs.

Consideration doesn’t have to be cash; the IRS can treat almost any benefit received in exchange for a policy as value.

What the rule says

Under Internal Revenue Code Section 101, death proceeds are generally excluded from income. But if a policy (or an interest in it) was acquired for valuable consideration, the exclusion is limited to what the new owner paid plus later premiums. The rest may be taxable income.

Consideration isn’t limited to cash. Services, other property, or any benefit given in exchange for the policy may qualify. Life settlements and business transactions are where this most often shows up.

The main exceptions

The rule does not apply when the policy is transferred to:

The insured
A partner of the insured
A partnership in which the insured is a partner (including LLCs taxed as partnerships)
A corporation in which the insured is a shareholder or officer

Transfers where the new owner’s basis carries over, such as most gifts between family members, are also generally protected. Note that a transfer to a co-shareholder is not on the list, which is a common trap in cross-purchase buy-sell planning when corporate owners swap policies.

Two common gray areas

Collateral assignments. The regulations state that pledging or assigning a policy as collateral security is not a transfer for value. Using a policy to secure a loan is generally safe; an assignment for another purpose may not be.

Beneficiary changes. The regulations focus on creating an enforceable contractual right to the proceeds. A revocable beneficiary change doesn’t create that right, so it is unlikely to be a transfer for value on its own, though there may be other reasons not to name someone in exchange for something.

Because these areas depend on facts, the client’s attorney or tax advisor should review any transfer before it happens.

How to fix a tainted policy

There is good news. A transfer back to the insured is never a transfer for value, and generally only the last transfer determines the tax result. So a policy tainted by an earlier transfer may be cleansed by transferring it back to the insured and then planning forward from there.

Keep in mind that sales of policies to unrelated parties now carry additional reporting requirements. Contact us with any questions about transferring ownership of an existing policy, and our team will help you think it through with the client’s advisors.

Frequently asked questions

What is a transfer for value in life insurance?

It occurs when a life insurance policy or an interest in it is transferred in exchange for valuable consideration. The death benefit may then be taxable except to the extent of the new owner’s basis.

What are the exceptions to the transfer-for-value rule?

Transfers to the insured, a partner of the insured, a partnership that includes the insured, or a corporation where the insured is a shareholder or officer are exceptions, as are most transfers where basis carries over, such as gifts.

Can a transfer-for-value problem be fixed?

Often yes. Since a transfer back to the insured is never a transfer for value and generally only the last transfer counts, moving the policy back to the insured can cleanse it. Clients should confirm with their tax advisor.

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Reviewed by Tim Fuller on 2026-09-26

Tim Fuller

President, SRS Inc.

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Business Continuation Planning: Using Life Insurance to Fund a Buy-Sell Agreement

September 26, 2026September 27, 2021 by Tim Fuller

Small business owners wear many hats, and succession planning rarely makes it to the top of the list. Yet without a plan, a death, disability or retirement can leave the business, the family and the remaining owners in limbo. A funded buy-sell agreement brings order to that moment.

Key takeaways

Many small business owners have thought about who would run the business without them, but far fewer have a formal continuation plan.
A buy-sell agreement guarantees a buyer, sets a price in advance and separates the family from the ongoing business.
Life insurance provides the cash to complete the buyout exactly when it’s needed.

A business can fail simply because no one agreed ahead of time on who would take over and how they would pay for it.

The planning gap

Surveys of small business owners have long shown a gap between thinking and doing: many owners say they have considered who would run the business in their absence, but far fewer have a documented continuation plan. When an owner dies, becomes disabled or retires without one, confusion over ownership, value and control can damage or even end the business.

What a buy-sell agreement does

A buy-sell agreement is a contract that says what happens to an owner’s interest when a triggering event occurs. A well-designed agreement:

Establishes a guaranteed buyer for the owner’s interest
Sets the price or valuation method while everyone is healthy and able to negotiate fairly
Lets surviving owners avoid running the business with a deceased owner’s family if they choose not to
Gives the family a fair price and liquidity when they need it most

Why life insurance is the natural funding tool

An agreement is only as good as the money behind it. Life insurance provides a known, generally income tax-free sum at the moment of death, so the buyer doesn’t have to borrow, drain business cash or pay in installments. Disability buy-out coverage can fund the agreement if an owner becomes disabled.

The structure matters. Choosing between a cross-purchase and an entity redemption affects taxes, basis and, after the Supreme Court’s 2024 Connelly decision, how corporate-owned insurance is counted in valuing the business. Our post on cross-purchase buy-sell agreements walks through one common approach.

How SRS helps

We can help you gather business valuation information, design the right coverage for each owner and compare options across our carrier partners. Contact us with your next business owner case and we’ll help you bring a clear, funded plan to the table.

Frequently asked questions

What is business continuation planning?

It is planning for what happens to a business when an owner dies, becomes disabled or retires, usually through a buy-sell agreement that sets a buyer, a price and a funding source.

Why use life insurance to fund a buy-sell agreement?

Life insurance delivers a known sum at the owner’s death, so the buyer has cash to complete the purchase without borrowing or straining the business.

What triggering events should a buy-sell agreement cover?

Most agreements address death, disability and retirement, and many also cover divorce, termination of employment and an owner’s desire to sell.

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Reviewed by Tim Fuller on 2026-09-26

Tim Fuller

President, SRS Inc.

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Term Conversion and Transfer to an ILIT: Which Comes First?

September 26, 2026September 21, 2021 by Tim Fuller

When a client’s health declines, converting term coverage to a permanent policy is often the smartest move they can make. If that policy is also headed to an irrevocable trust, the order of the two steps can change the value reported for the transfer and the cash or gift needed to make it happen.

Key takeaways

Converting term to permanent coverage preserves insurability when a client’s health has declined.
Transferring before or after conversion can produce different fair market values for gift or sale purposes.
A lower value can keep a gift within annual exclusions or reduce the cash a grantor trust needs to buy the policy.

The order of the steps matters, and the right sequence usually turns on which approach produces the lower defensible value.

A common planning scenario

A client owns a personally held term policy. Their health has changed, so converting to permanent coverage without new underwriting is valuable. They also want the policy in an irrevocable life insurance trust (ILIT) to keep the death benefit out of their taxable estate, protect it from creditors, or manage it for heirs.

The question: convert first and then transfer, or transfer the term policy and let the trustee convert?

How each policy is valued

The answer usually depends on the fair market value (FMV) of the contract at the time of transfer:

Term policy. An in-force level term policy is often valued using its interpolated terminal reserve plus any unearned premium. Level term does build a modest reserve because premiums stay flat while the cost of coverage rises.
Newly converted permanent policy. In its first contract year, a new policy is often valued at the premiums paid.

Advisors often choose the sequence that produces the lower value. The carrier can provide the numbers, typically on IRS Form 712, and the client’s legal and tax advisors should confirm the approach.

Why a lower value helps

If the policy is gifted to the trust, a lower value may keep the gift within the annual exclusions available to the trust beneficiaries, which can avoid using lifetime exemption. Note that gifts of life insurance within three years of death can still be pulled back into the estate.

If the policy is sold to a grantor trust to avoid the three-year rule, a lower value means less cash has to be gifted to the trust to fund the purchase. A sale to the insured’s grantor trust is also generally protected from the transfer-for-value rule. For more on grantor trusts, see our post on grantor trust planning.

Let us help with the sequence

Conversion deadlines, carrier rules and trust documents all have to line up. Contact us when a case involves both a conversion and an ownership change. We’ll gather the valuation information for both policies and help the client’s attorney and CPA order the transactions correctly.

Frequently asked questions

Should a term policy be converted before or after transfer to an ILIT?

It depends on which sequence produces the lower defensible fair market value and fits the client’s goals. Compare the term policy’s value with the new permanent policy’s first-year value and confirm with legal and tax advisors.

How is the value of a term policy determined for gift purposes?

An in-force term policy is often valued at its interpolated terminal reserve plus unearned premium. The carrier can provide this figure, usually on IRS Form 712.

Why sell a policy to a grantor trust instead of gifting it?

A gift of a policy within three years of death can be included in the estate. A sale for full value to a grantor trust generally avoids that rule and is also generally protected from transfer-for-value taxation.

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Reviewed by Tim Fuller on 2026-09-26

Tim Fuller

President, SRS Inc.

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Reportable Policy Sales: IRS Reporting Rules for Life Insurance Ownership Changes

September 26, 2026September 7, 2021 by Tim Fuller

The Tax Cuts and Jobs Act of 2017 added reporting rules for certain transfers of life insurance policies. They were aimed at life settlements, but they can reach further. Advisors handling ownership changes should know when a transfer may be a reportable policy sale and who must file what.

Key takeaways

A reportable policy sale is generally the acquisition of a policy by someone with no substantial family, business or financial relationship with the insured apart from the policy itself.
The acquirer, the carrier and, at death, the payer each have reporting duties on Form 1099-LS, 1099-SB or 1099-R.
The rules can reach business and some family transfers, not just life settlements, so every ownership change deserves a review.

The reporting rules were aimed at life settlements, but they are broad enough to touch everyday business and family ownership changes.

Why the rules exist

Many policy transfers for value make part of the death benefit taxable under the transfer-for-value rule. Historically, the IRS had little visibility into those transfers, so taxable death benefits often went unreported. The 2017 tax law responded by creating reporting requirements for reportable policy sales.

What counts as a reportable policy sale

A reportable policy sale is generally the direct or indirect acquisition of an interest in a life insurance policy when the acquirer has no substantial family, business or financial relationship with the insured apart from the acquirer’s interest in the policy. Traditional life settlements clearly qualify, but some business transactions and ownership changes may also need to be analyzed under the regulations.

Who files what

The acquirer files Form 1099-LS with the IRS and provides copies to the seller and the issuing carrier.
The carrier files Form 1099-SB with the IRS and the seller, reporting the seller’s investment in the contract and surrender value.
At the insured’s death, the payer reports the death benefit on Form 1099-R.

Failing to file can create penalties, back taxes and professional fees that are easy to avoid by addressing the question up front.

Protecting your clients

Before any ownership change, confirm with the client’s tax advisor whether the transfer could be a reportable policy sale or a transfer for value. Contact us if you need help thinking through an ownership change. Our team can gather the policy information advisors need and help you keep the case in good order.

Frequently asked questions

What is a reportable policy sale?

It is generally the acquisition of an interest in a life insurance policy by someone who has no substantial family, business or financial relationship with the insured apart from the policy interest itself.

What IRS forms are required for a reportable policy sale?

The acquirer files Form 1099-LS, the issuing carrier files Form 1099-SB, and reportable death benefits paid later are reported on Form 1099-R.

Do the reporting rules apply only to life settlements?

No. They were aimed at life settlements, but the definition is broad enough that some business and family transfers may need to be evaluated as well.

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Reviewed by Tim Fuller on 2026-09-26

Tim Fuller

President, SRS Inc.

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How to Use RMDs to Fund Life Insurance: Getting the Case Underwritten

September 26, 2026August 24, 2021 by Tim Fuller

Many retirees must take required minimum distributions they don’t actually need. Redirecting that money into life insurance can turn a taxable distribution into a larger, income-tax-free legacy for heirs. The concept is simple; the hard part is financial justification, and that’s where carrier choice matters.

Key takeaways

Using unneeded RMDs to pay life insurance premiums can leverage a taxable IRA distribution into a larger income-tax-free death benefit.
Because retirees usually have no earned income, carriers justify coverage with net worth formulas instead of income multiples.
Owning the policy in a trust can avoid probate, control distributions and add creditor protection even when there’s no estate tax concern.

Use the money the client must take but doesn’t need, and leverage it into a death benefit for the next generation.

Why the RMD-to-life concept resonates

Required minimum distributions generally begin at age 73. For clients whose pensions, Social Security and other assets already cover their living expenses, RMDs are often just a tax bill. Redirecting the after-tax amount to life insurance premiums can create a death benefit that is typically much larger than the RMDs used to fund it and passes to beneficiaries income-tax-free.

The idea has gained strength since the SECURE Act. Most non-spouse IRA heirs must now empty an inherited IRA within 10 years, which can push distributions into higher tax brackets. For more on that shift, see our article on IRAs and the SECURE Act.

The underwriting challenge: financial justification

A client in their 70s seldom has earned income, so coverage can’t be justified as income replacement. Often there’s no federal or state estate tax exposure either. That leaves underwriters asking why the coverage is needed and how much makes sense.

Carriers that are comfortable with this concept usually look at two things:

Premium as a share of income. What percentage of the client’s annual income is going to premiums? A higher share may be acceptable when the file clearly shows living expenses are covered by what remains.
Face amount formula. The death benefit is typically limited by a formula tied to assets. A common example: permissible coverage equals 50% of net worth attributable to investment assets, plus the fair market value of the residence, minus coverage already in force.

Formulas differ by carrier, which is why placing the case with the right carrier matters. Our guide to financial underwriting covers more of what underwriters look for.

Don’t overlook trust ownership

Because many of these policies are bought when no estate tax is expected, clients often skip trust ownership. That can be a missed opportunity:

A living trust keeps proceeds out of probate and allows distributions on a schedule that a simple beneficiary designation can’t provide.
An irrevocable trust can also protect the proceeds from creditors and keep them out of the taxable estate.

Encourage clients to review ownership with their attorney before the policy is issued.

How SRS can help

We know which carriers are comfortable with the RMD-to-life-premium concept and how they size coverage for retirees. Send us the client’s age, health overview, assets and RMD amount, and we’ll help you design the case and position it for underwriting. We also have marketing material to help you introduce the idea to clients.

Frequently asked questions

At what age do RMDs start?

For most people, required minimum distributions generally begin at age 73. Clients should confirm their own start date with their tax advisor.

How much life insurance can a retiree with no earned income buy?

Carriers usually use an asset-based formula rather than an income multiple. One common example is 50% of investment-related net worth plus the home’s value, minus existing coverage. Each carrier sets its own limits.

Is the death benefit taxable to heirs?

Life insurance death benefits are generally received income-tax-free by beneficiaries. Estate tax treatment depends on who owns the policy, which is one reason trust ownership is worth discussing.

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Reviewed by Tim Fuller on 2026-09-26

Tim Fuller

President, SRS Inc.

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Buy-Sell Funding: Cross-Purchase vs. Entity Redemption After Connelly

September 26, 2026August 10, 2021 by Tim Fuller

How a buy-sell agreement is structured matters as much as whether it’s funded. The Supreme Court’s 2024 decision in Connelly v. United States made the choice between cross-purchase and entity redemption more important for many business owners. Here’s how the two compare, and why informal shortcuts cause trouble.

Key takeaways

In a cross-purchase, owners buy policies on each other; in an entity redemption, the business owns the policies and buys back the shares.
After Connelly (2024), life insurance proceeds held by a corporation to redeem shares can increase the company’s value for estate tax purposes.
Joint policy ownership without a written agreement gets money to the survivors but leaves price, obligation and tax questions unresolved.

Buy-sell plans built only on joint policy ownership assure one thing: the money gets to the buyers. After that, it’s all up for grabs.

Cross-purchase vs. entity redemption

Cross-purchase: Each owner owns and is beneficiary of a policy on the other owners. At a death, the survivors receive the proceeds and buy the deceased owner’s interest. Survivors generally get a step-up in basis on the purchased shares. The downside is complexity as the number of owners grows. Our article on cross-purchase agreements goes deeper.

Entity redemption: The business owns one policy on each owner and uses the proceeds to redeem the deceased owner’s shares. It’s simpler to administer, but surviving owners don’t get the same basis increase, and after Connelly the estate tax picture changed.

What Connelly v. United States changed

In Connelly v. United States (2024), the Supreme Court held that a corporation’s obligation to redeem a deceased shareholder’s stock does not offset the life insurance proceeds it receives to fund that redemption. As a result, the proceeds increased the value of the company, and of the deceased owner’s shares, for estate tax purposes.

For owners with larger estates, corporate-owned redemption plans may now create more estate tax exposure than expected. Many advisors are reviewing existing entity plans and considering cross-purchase or other structures. With the federal exemption now $15 million per person, this matters most for larger businesses, but clients should review it with their tax and legal advisors.

The trouble with jointly owned policies

Because drafting a formal agreement takes time and legal fees, some owners skip it and simply own policies jointly. With owners A, B and C, A and B jointly own the policy on C, and so on. When C dies, A and B have funds to buy C’s interest.

But without a written agreement:

Surviving owners have no legal obligation to buy, leaving the deceased owner’s family in limbo.
The estate has no obligation to sell, so heirs may become new business partners.
There’s no fixed price for estate or income tax purposes.
Rearranging interests in the remaining policies could trigger transfer-for-value problems.

What advisors should do

If clients refuse to put a written plan in place, at least get coverage issued with the most suitable ownership arrangement, since the worst outcome is a death with no coverage in force. Then document your advice with a letter recommending they review the plan with their tax and legal advisors. Our buy-sell and business transition article offers more ideas.

Frequently asked questions

What is the main difference between cross-purchase and entity redemption?

In a cross-purchase, the owners buy policies on each other and purchase the shares themselves. In an entity redemption, the business owns the policies and buys back the shares.

What did Connelly v. United States decide?

The Supreme Court held in 2024 that life insurance proceeds a corporation receives to redeem a deceased owner’s shares are not offset by the redemption obligation, which can increase the company’s value for estate tax purposes.

Is joint ownership of life insurance a valid buy-sell plan?

It gets money to the surviving owners, but without a written agreement there’s no obligation to buy or sell and no set price. A formal agreement drafted by an attorney is strongly recommended.

50+ Years in Business60+ Top-Rated Carriers★★★★★ Rated by Advisors

Reviewed by Tim Fuller on 2026-09-26

Tim Fuller

President, SRS Inc.

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Collateral Assignment of Life Insurance: 7 Rules to Get It Right

September 26, 2026August 3, 2021 by Tim Fuller

Life insurance is often used to secure a loan, especially in business. Under time pressure, the lender is frequently just named as beneficiary for the loan amount, and that’s where the trouble starts. A properly executed collateral assignment protects both the lender and the family.

Key takeaways

Never secure a loan by naming the lender as beneficiary; use a collateral assignment instead.
Use the carrier’s own assignment form, get approval for any changes and make sure the carrier has it on file.
A collateral assignment on a modified endowment contract can create taxable income to the extent of gain in the policy.

Rule #1: Never secure a loan with a beneficiary designation. Always use a collateral assignment.

Why a beneficiary designation is the wrong tool

When a lender is simply added as beneficiary, no one remembers to reduce that interest as the loan is paid down or paid off. If the insured dies, the lender may collect more than it is owed, and the family is short-changed. The reverse can happen too: a beneficiary designation can be changed without the lender knowing, leaving the loan unsecured.

How a collateral assignment works

A collateral assignment is a formally documented lien on the policy in favor of the creditor. The creditor stands first in line for the portion of the death benefit described in the assignment, typically the outstanding loan balance, and the rest goes to the named beneficiaries. When the loan is repaid, the assignment is released. For more on using coverage to secure business debt, see our article on term insurance for business loans.

The 7 rules for collateral assignments

Never secure a loan with a beneficiary designation. Always use a collateral assignment.
Use the carrier’s assignment form.
Get the carrier’s permission before making any modifications to the form.
Avoid practicing law. Only modify the assignment at the direction of the client or the client’s attorney.
Date it correctly. The assignment should be dated after the policy is in force.
File it with the carrier. Otherwise the carrier won’t know to protect the creditor’s rights when benefits are paid.
Watch for MECs. If the policy is a modified endowment contract, the amount secured by the assignment is generally treated as a taxable distribution to the extent of gain in the contract. Make sure the client understands this before signing.

Get help with the details

For all its simplicity in concept, a collateral assignment often raises questions as each case brings its own circumstances. Contact us for help with carrier forms, approvals and implementation, or with sizing coverage for a lender requirement. Our article on key person coverage covers related business needs.

Frequently asked questions

What is a collateral assignment of life insurance?

It is a formal lien on a policy in favor of a lender. The lender is paid first from the death benefit, up to the amount owed, and the remainder goes to the named beneficiaries.

Why not just name the bank as beneficiary?

A beneficiary designation doesn’t shrink as the loan is repaid, so the lender may receive more than it’s owed. It can also be changed without the lender’s knowledge.

Does a collateral assignment have tax consequences?

Usually not, but if the policy is a modified endowment contract, the amount secured can be treated as a taxable distribution to the extent of gain in the contract.

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Reviewed by Tim Fuller on 2026-09-26

Tim Fuller

President, SRS Inc.

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State Estate and Inheritance Taxes: The Gap the Federal $15M Exemption Doesn’t Cover

September 26, 2026July 27, 2021 by Tim Fuller

With the federal estate tax exemption now $15 million per person, many clients assume estate tax is no longer their problem. But a number of states impose their own estate or inheritance taxes, often with much lower thresholds. For clients in those states, life insurance still plays an important role in estate liquidity.

Key takeaways

The federal exemption is $15 million per person ($30 million for couples) under the One Big Beautiful Bill Act, but state taxes are separate.
Some states levy an estate tax with exemptions far below the federal level, and a few levy inheritance taxes on what heirs receive.
A large life insurance policy can itself push a client’s estate over a state threshold if it isn’t owned properly.

A client can owe nothing to the IRS and still leave heirs a sizable state estate or inheritance tax bill.

The federal picture: $15 million and permanent

The One Big Beautiful Bill Act, signed in July 2025, set the federal estate and gift tax exemption at $15 million per person ($30 million for married couples) starting in 2026, with no sunset and inflation indexing after 2026. The top federal rate remains 40%. For most clients, federal estate tax is no longer a concern. See our article on the $15 million exemption for details.

That doesn’t mean estate planning is finished. Clients should still be reassured, with clear explanations, about where they stand, and some clients face state-level taxes the federal change didn’t touch.

State estate taxes vs. inheritance taxes

State estate taxes are charged on the estate itself before assets pass to heirs. A number of states and the District of Columbia have one, and some exemptions are far lower than the federal amount, in some states as low as $1 million.

Inheritance taxes are charged on what a beneficiary receives, and the rate often depends on the heir’s relationship to the deceased. Spouses are usually exempt and children often are, while siblings, nieces, nephews and friends may pay more. At least one state has both an estate tax and an inheritance tax.

State rules and thresholds change regularly, so always confirm current law for the client’s state of residence and any state where they own real estate.

How life insurance can create or solve the problem

Life insurance can push a client into a state estate tax without anyone noticing. Consider a 35-year-old who buys a $3 million term policy to replace a $100,000 income over 30 working years. If that policy is owned personally, the death benefit counts in the estate and could exceed a low state exemption.

The fix is usually ownership. An irrevocable life insurance trust can keep proceeds out of the taxable estate while still providing liquidity to pay any state tax that remains. Our article on estate tax liquidity covers how coverage fills that need.

Questions to ask clients

Which state do you live in, and do you own property in any other state?
Who owns your existing life insurance policies?
Would your heirs include anyone other than a spouse or children?
Have you reviewed your plan since the 2025 federal changes?

Frequently asked questions

Which states have an estate or inheritance tax?

A number of states and the District of Columbia impose an estate tax, and a handful impose an inheritance tax. The list and thresholds change, so confirm current law for the client’s state.

Does the $15 million federal exemption apply to state estate taxes?

No. State estate taxes have their own exemptions, and some are much lower than the federal amount.

Can life insurance proceeds be subject to state estate tax?

Yes, if the insured owns the policy at death the proceeds are generally included in the estate. Trust ownership can help keep them out.

50+ Years in Business60+ Top-Rated Carriers★★★★★ Rated by Advisors

Reviewed by Tim Fuller on 2026-09-26

Tim Fuller

President, SRS Inc.

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Trusts in a Nutshell: Key Trust Types Every Insurance Advisor Should Know

September 26, 2026July 20, 2021 by Tim Fuller

Trusts show up in almost every advanced life insurance case. You don’t need to be an attorney to work with them, but you do need to know the basic types and what each one does. Here’s a plain-English glossary.

Key takeaways

A revocable trust avoids probate but offers no tax benefits or creditor protection.
An irrevocable trust, including an ILIT, can remove assets from the taxable estate and protect them from the creator’s creditors.
SLATs and dynasty trusts let families keep access to or pass wealth across generations without estate inclusion.

Trusts were in use long before wills, and they remain one of the most important tools in estate planning.

The basics of a trust

A trust is created when a person (the creator, maker or grantor) puts legal title to property in the name of a trustee, who holds and manages it for the benefit of others (the beneficiaries) according to the trust document.

An inter vivos trust is created during the creator’s life.
A testamentary trust is created by the creator’s will after death.

Revocable vs. irrevocable trusts

Revocable trust: The creator can change or revoke it at any time and add or withdraw property at will. It keeps property out of probate, but provides no tax advantages and no protection from the creator’s creditors.

Irrevocable trust: Property is removed from the creator’s control. In exchange, it is generally kept out of the creator’s taxable estate and protected from the creator’s creditors.

ILIT (irrevocable life insurance trust): An irrevocable trust set up primarily to own life insurance, though it can usually hold other assets too. Choosing the trustee is an important decision; see our article on choosing an ILIT trustee.

Advanced trust types

Grantor (intentionally defective) trust: An irrevocable trust where income taxes flow back to the creator, while the assets stay outside the creator’s taxable estate. Most irrevocable trusts are grantor trusts. Our article on grantor trusts explains why that matters.

SLAT (spousal lifetime access trust): An irrevocable trust that gives the creator’s spouse a lifetime interest, with the remainder usually going to children. The spouse can have generous access during life, but what’s left isn’t included in the spouse’s taxable estate.

Dynasty (generation-skipping) trust: Each generation of beneficiaries has only a lifetime interest, which passes to the next generation at death. Because each interest ends at death, the assets are not included in any beneficiary’s taxable estate.

Why this matters for your cases

Knowing these terms helps you spot planning opportunities and talk comfortably with a client’s attorney. Even with the federal exemption at $15 million per person, trusts remain valuable for probate avoidance, creditor protection, control and state estate taxes. Contact us with questions on any trust-owned case.

Frequently asked questions

What’s the difference between a revocable and an irrevocable trust?

A revocable trust can be changed at any time and avoids probate but offers no tax or creditor benefits. An irrevocable trust generally can’t be changed but can remove assets from the taxable estate and protect them from creditors.

What is an ILIT?

An irrevocable life insurance trust is set up mainly to own life insurance so the death benefit stays out of the insured’s taxable estate.

What is a SLAT?

A spousal lifetime access trust is an irrevocable trust that lets the creator’s spouse benefit during life, with the remainder passing to other beneficiaries outside the spouse’s estate.

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Reviewed by Tim Fuller on 2026-09-26

Tim Fuller

President, SRS Inc.

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