The passage of H.R. 1, the One Big Beautiful Bill Act (OBBBA) on July 4, 2025, has created an environment of relative certainty for federal estate planning by making estate and gift tax exemptions permanent. This permanence has significant implications for estate planning, allowing businesses and individuals to implement strategies and utilize techniques that can preserve wealth for generations to come.
Families with closely held businesses and substantial assets must develop an understanding of how insurance integrates with estate planning to gain advantages from this critical relationship. Without proper insurance planning, even the most sophisticated estate structures could fail if liquidity isn’t there when it’s most needed.
Our previous discussions of H.R. 1, explored how the permanent exemptions change your estate plan and four strategies that can save millions. Now, we’ll examine a critical implementation tool that makes many of those strategies work: life insurance.
While most business owners think about estate planning and insurance as separate concerns, the reality is that they work best when integrated. This integration can mean the difference between preserving your business for the next generation or forcing a sale due to liquidity pressures.
Why Insurance Matters More Than Ever in Estate Planning
Estate planning begins with setting clear goals: ensuring assets go to the right people, minimizing taxes, and protecting your family if you become incapacitated. Legal documents such as wills, trusts, powers of attorney, and healthcare directives, create the foundation that supports those goals.
Unfortunately, legal documents alone don’t solve the liquidity problem. When someone dies with a taxable estate, federal estate tax is due within nine months, and the options for extending payment are limited.
If you concentrate your wealth in business interests or real estate, where will the cash come from? Planning ahead and using specific types of life insurance addresses this need and can provide immediate liquidity exactly when your estate needs it most.
The Liquidity Challenge for Business Owners
Consider this fact pattern: A family business is worth $20 million, the owner also owns $8 million in real estate and has retirement accounts and investments totaling $7 million, bringing the total estate to $35 million.
Under current law, the federal estate tax exemption is $13,990,000 per person or $27,980,000 for married couples using the portability provision. (Source: IRS Rev. Proc. 2024-40)
Even with higher exemptions under H.R. 1, this estate faces significant tax exposure. The problem isn’t just the amount, it’s how to pay it given the nine-month federal timeline. Businesses can’t sell overnight, and it takes time to list, market, and sell real estate. Tapping retirement funds prematurely would compound the liquidity problem by adding income-tax penalties.
While the Internal Revenue Code offers limited relief, such as extensions under IRC § 6161 (for hardship) or installment payment elections under § 6166 (for estates with closely held business interests), these provisions merely defer, not eliminate, the tax, and interest continues to accrue during the extension period. Estates must also qualify and adhere to strict requirements to maintain these benefits.
Without proactive planning, families may face impossible choices, borrowing against the business, selling assets at distressed prices, or relying on short-term IRS payment plans. Life insurance remains the most reliable and immediate solution, providing tax-free liquidity at exactly the moment it is needed, ensuring that estate taxes and administrative costs can be paid without disrupting business continuity or family wealth.
How did H.R. 1 (OBBBA) change the planning environment?
Before H.R. 1, lawmakers scheduled the estate and gift tax exemptions to sunset in 2026, dropping to roughly half their current amounts. H.R. 1 eliminated that sunset, making the higher exemption levels permanent. While this created planning stability, it did not eliminate the need for insurance-based liquidity strategies.
High-net-worth families still face federal estate tax, and state-level estate taxes remain a concern in many jurisdictions, including:
- Oregon: $1M exemption, 10-16% rates (Source: Oregon Dept. of Revenue, 2025)
- Illinois: $4M exemption, with rates of up to 16% (Source: Illinois Attorney General 2023-2025)
- Rhode Island: $1,802,431 exemption and up to a 16% rate (Source: State of Rhode Island, Division of Taxation, Department of Revenue, 2025)
For business owners, the permanence of the federal exemption means you can plan with confidence, but you must also ensure that you implement strategies that provide cash to your estate to execute your plan without disrupting business operations.
How Life Insurance Creates Estate Planning Solutions
As a risk management tool, life insurance provides financial certainty that legal documents alone cannot. Death benefits are generally income tax-free to beneficiaries under Internal Revenue Code Section 101(a). When individuals own policies through structures such as irrevocable life insurance trusts (ILITs), they can exclude the proceeds from the taxable estate under IRC Section 2042.
Four Key Applications for Estate Planning
1. Tax-free liquidity
An ILIT creates an immediate cash benefit to pay estate taxes without forcing asset sales. For high-net-worth business owners, this provides breathing room to sell business interests or real estate in an orderly fashion rather than under distress.
2. Equalizing inheritances
When one child receives the business that represents 60-70% of the estate value, insurance proceeds can equalize inheritances for other children. The child who gets the business receives an illiquid but valuable asset, while others receive liquid cash. Both receive equal value appropriate to their situations.
3. Wealth replacement for charitable giving
When you donate appreciated assets to charity, insurance can replace that value for heirs. A $5 million charitable gift paired with a $5 million policy owned by an ILIT ensures that children receive their intended inheritance while you accomplish your philanthropic goals.
4. Funding business buy-sell agreements
In closely held businesses with multiple owners, buy-sell agreements facilitate smooth transitions of ownership. Insurance provides cash for surviving owners to purchase the deceased owner’s shares. IRC Sections 302 and 303 permit this favorable tax treatment.
Choosing the Right Insurance for Estate Planning
Term insurance
Provides coverage for a specified period (10-30 years) at affordable rates but expires at the term’s end. It works well for temporary needs like income replacement but is less suitable for permanent estate planning since most people outlive their policies.
Permanent insurance
Whole life, universal life, variable universal life remains in force for your lifetime and builds cash value. For estate planning, permanent insurance is often preferred because it guarantees death benefit coverage at any time of death.
Second-to-die (survivorship) insurance
Especially valuable for married couples. These policies cover both spouses and pay only after the second death, which is the point at which federal estate tax becomes due under IRC Section 2056(b). These policies cost significantly less than insuring each spouse separately because the insurance company makes a single payment and postpones the payout, while they align perfectly with the actual need for liquidity.
Advanced Strategy: Irrevocable Life Insurance Trusts (ILITs)
An irrevocable life insurance trust (ILIT) removes life insurance proceeds from your taxable estate, providing tax-free liquidity without increasing your estate tax burden.
How ILITs Keep Insurance Proceeds Outside Your Taxable Estate
If you own a life insurance policy at death, the IRS includes the death benefit in your gross estate under IRC Section 2042. For a high-net-worth individual with a $5 million policy, the individual increases the taxable estate by $5 million, which may lead to an additional $2 million estate tax liability at a 40% rate.
An ILIT solves this issue through ownership transfer. The ILIT, not you, owns the policy. Because you do not own it at death, the life insurance benefit proceeds aren’t included in your taxable estate.
Here’s the process:
01
You establish an irrevocable trust and designate the beneficiaries, who are usually your children. With the trust being irrevocable, you can’t change it later.
02
The ILIT purchases a life insurance policy on your life, or you transfer an existing policy to it.
Transferring an existing policy triggers a three-year look-back rule under IRC Section 2035, so you must conduct a thorough review if you consider this process.
03
Funding the ILIT is the next step. You gift money to the ILIT to pay premiums and use Crummey withdrawal rights to qualify the gifts for the annual exclusion.
04
At death, the ILIT receives the death benefit tax-free, and the trustee uses these funds to provide estate liquidity.
Result: immediate tax-free liquidity that doesn’t increase your taxable estate. For a $5 million policy, this saves $2 million in estate taxes compared to a direct ownership insurance policy.
The Crummey Withdrawal Strategy Explained
To qualify the premium funds as gifts to an ILIT, beneficiaries must have a present interest in the gift. Crummey withdrawal rights solve this by using an annual gift tax exclusion under IRC Section 2503(b). The process is named after Crummey v. Commissioner, 397 F.2d 82 (9th Cir. 1968).
When you gift money to the ILIT for premiums, the trust grants beneficiaries a temporary right to withdraw their share, which lasts for a period of 30 to 60 days. This converts a future interest into a present interest. The trustee sends a formal Crummey notice each time you make a gift. Beneficiaries rarely exercise this right, but the legal option is what matters for tax purposes.
As of tax year 2025, the annual exclusion is $19,000 per beneficiary per year (IRC §2503(b)). This means you can gift up to $19,000 per beneficiary to the ILIT each year without using your lifetime exemption. A married couple can combine exclusions to gift $38,000 per beneficiary. (Source: IRS Rev. Proc. 2024-40)
Common ILIT mistakes to avoid
| Failing to send Crummey notices: | Retaining incidents of ownership: |
| Every premium gift requires a notice to beneficiaries. Missing even one can disqualify that gift from the annual exclusion. | If you retain any policy rights (such as being able to change beneficiaries, borrow against cash value, or cancel the policy), the IRS may argue that you still own it, pulling it back into your estate under IRC Section 2042. |
| Three-year look-back problems: | Misaligned trust terms: |
| Transferring an existing policy triggers IRC Section 2035. If you die within three years, your estate includes the death benefit. Whenever possible, have the ILIT purchase new coverage. | The ILIT document must authorize the trustee to loan money to your estate, purchase estate assets, or distribute funds for estate tax payments. Without these provisions, liquidity might be trapped when your estate needs it. |
Questions about whether an ILIT is right for your situation?
Our tax planning specialists can walk you through the analysis and coordinate with your estate attorney.
The Special Challenge of Closely Held Businesses
For many families, the most valuable estate asset is a closely held business. These businesses represent years of work and family identity, but they pose unique estate planning challenges.
Why do business owners face unique liquidity crises?
Unlike marketable securities, you cannot liquidate a family business overnight. Selling even part of it could disrupt operations or destroy value. Yet, federal estate taxes are payable within nine months of death.
Without enough liquidity, heirs face tough choices. They may need to borrow against the business, which can strain cash flow. They might also sell assets at distressed prices, often 30-40% below market value. Another option they would have to consider is negotiating IRC Section 6166 installment plans, which add ongoing stress. Or, they may have to sell the entire business, eliminating the family’s wealth engine and part of their legacy.
Example:
A regional manufacturing company owner with a $30M business faced a $15M estate tax bill. By establishing a $15M second-to-die policy in an ILIT, the family ensured cash availability, allowing their son to continue operations without a forced sale.
How does insurance prevent forced business sales?
Life insurance, especially survivorship policies held in an ILIT, creates immediate liquidity at death.
Consider the alternative. For a $40 million business with a $16 million estate tax liability, if the family sells the business to pay the tax, they net $16 million. But with the guidance you’ve provided to your heirs, what if that business could have grown to $80 million over the next decade under continued family leadership? The opportunity cost of losing out on that continued growth can be life-changing.
A $16 million insurance policy costs a fraction of the business’s value but preserves the entire business for future generations. Insurance premiums over 20 to 30 years usually amount to 10 to 15% of the death benefit, which is significantly less than the value lost in a forced sale.
Coordinating Your Estate and Insurance Plans
Successful integration of estate and insurance plans requires careful coordination. A critical rule is that beneficiary designations override your will or trust provisions. It doesn’t matter what your will says if life insurance, retirement accounts, or bank accounts have different beneficiaries—the stated beneficiary designation controls.
Common coordination pitfalls:
- Outdated beneficiaries after divorce, remarriage, or birth
- Direct policy ownership that includes death benefits in your taxable estate under IRC Section 2042
- Underestimating liquidity needs in illiquid estates.
- Ignoring state-level estate taxes
- Missing integration opportunities by treating insurance in isolation from other estate strategies
The solution is to review all beneficiary designations every 2-3 years and after each major life event.
Ensure life insurance, retirement accounts, and investment accounts align with your overall estate plan. For assets intended to flow through your trust, name the trust as the beneficiary.
REDW helps business owners integrate insurance into estate planning.
At REDW Advisors & CPAs, we understand that protecting your business legacy requires the strategic integration of estate planning, tax strategy, and insurance solutions. Our approach combines technical expertise with collaborative coordination.
We calculate potential estate tax liability, model different insurance strategies, and show actual dollar differences between approaches. We work with your estate attorney to ensure ILIT documents are properly drafted and help establish procedures for Crummey notices and premium gifts. For closely held businesses, we provide or coordinate valuations, help outside counsel structure buy-sell agreements, and integrate insurance into succession planning. We serve as the central coordination point among your estate attorney, insurance professionals, and wealth advisors.
What distinguishes REDW is our client-first approach. We don’t just prepare estate tax returns—we run scenarios showing exactly how different insurance strategies affect your estate tax, your heirs’ net inheritance, and your business continuity, guiding you toward making the best decisions possible for your situation and your family.
Your Next Steps
The stability provided by H.R. 1 (OBBBA) creates a unique window for strategic estate planning. Insurance-based liquidity strategies—particularly ILITs and business succession planning—can preserve millions while ensuring that your business continues under your intended leadership.
If you’re a business owner with substantial assets, evaluate whether your estate has adequate liquidity protection:
- Could your estate pay taxes without selling your business?
- Are your policies owned properly to avoid estate inclusion?
- Do beneficiary designations align with your estate plan?
- Have you reviewed your strategy in the last two years?
If you answered ‘no’ or ‘I’m not sure’ to any of these questions, schedule time now for a comprehensive review.
The best time to plan for estate liquidity is before you need it. Partner with REDW for Integrated Estate and Insurance Planning
We bring more than 70 years of trusted expertise to your planning. Our team works alongside your attorney and insurance professionals to ensure every element of your plan works together seamlessly.
Whether you’re planning business succession, evaluating ILIT strategies, or ensuring your estate has needed liquidity, we provide strategic guidance that protects your legacy.
Ready to build a unified estate and insurance strategy?
Contact our Tax Planning & Compliance team to discuss your estate planning needs and ensure your business succession plan is tax-efficient and properly structured.
Or explore our Tax Consulting services to learn more.
References
Internal Revenue Code §§ 101, 2001, 2010, 2035, 2042, 2056, 2503(b), 2703, 302, 303, 6166
Treasury Regulations under Subchapter B (Estate, Gift, and GST Taxes)
Crummey v. Commissioner, 397 F.2d 82 (9th Cir. 1968)
H.R. 1, One Big Beautiful Bill Act (OBBBA), Pub. L. No. 119-21 (2025)
IRS Publication 559, Survivors, Executors, and Administrators
IRS Notice 2025-14, Internal Revenue Bulletin: 2025-14
