Wealth Transfer Strategy: “Topping Off” Proposed Increased of Lifetime Gift Tax Exclusion to Fund an ILIT

Richard Schechter |

High-net-worth families are continually seeking ways to transfer wealth efficiently while minimizing transfer taxes. One effective strategy—especially in the current environment of potential changes to the lifetime gift and estate tax exclusion—is to strategically “top off” expanded exclusion amounts through the funding of an Irrevocable Life Insurance Trust (ILIT).

Here’s how the strategy works:

Background on the Lifetime Gift Tax Exclusion

For 2025, the lifetime gift and estate tax exclusion amount is $13.99 million per individual ($27.98 million per married couple). Under proposed changes to the current law that is scheduled to sunset at the end of this year, this exclusion amount may be raised to $15 million per person.

Opportunity to “Top Off” the Exclusion

If and when the exclusion amount increases, individuals who have already used their prior exclusion can make an additional gift of the incremental increase—$1 million per person (or $2 million per couple)—without incurring gift tax.

If the pending legislation raising the exclusion is passed, families can “top off” by making a proactive gift of this additional $1 million when it becomes available.

Funding an ILIT

One of the most tax-efficient ways to deploy this top-off gift amount is by funding an ILIT. An ILIT is a trust specifically designed to own life insurance policies outside of the taxable estate. The ILIT provides multiple benefits:

  • Adds an additional wealth transfer strategy to beneficiaries that will benefit future generations
  • Provides future liquidity that a trustee can utilize for beneficiaries, such as personal or business needs, or family legacy goals
  • Protects insurance proceeds from creditors and future estate taxation

Insuring Children and Grandchildren

Another layer of strategic planning is to insure younger generations—children or grandchildren—in addition to the parents. Policies on younger insureds are generally more cost-effective (lower premiums, longer durations) and provide the opportunity for multi-generational wealth transfer. The ILIT structure ensures these policies are efficiently owned and protected.


 

 

Combining Lifetime Gifts with Annual Exclusion Gifts

In addition to using the lifetime exclusion to fund the ILIT, families can also make annual exclusion gifts—currently $19,000 per donee in 2025 (or $38,000 per married couple)—to pay ongoing premiums. These annual gifts qualify for the gift tax annual exclusion if structured properly (typically using Crummey powers).

For example:

  • Parents could contribute the $1 million “top-off” amount to the ILIT, which could be used to fund high cash value whole life policies or to endow the trust to cover future premiums on other types of policies.
  • They could also make $19,000 annual exclusion gifts for each insured beneficiary (children or grandchildren) to further fund the ILIT’s premium obligations.

Why Act Now?

By combining the expected increase in the lifetime exclusion with annual exclusion gifts and funding an ILIT, families can transfer significant wealth tax-efficiently while also providing a long-term financial resource for their heirs.

As always, clients should work closely with their advisors—attorneys, CPAs, and wealth managers—to ensure proper trust design, compliance with gift tax rules, and alignment with their overall estate plan.