The ILIT Strategy Most Surgeons Overlook Until It's Too Late
A $15 million federal basic exclusion amount does not end the estate-planning conversation. For many surgeons, it begins a different one.
For 2026, the federal basic exclusion amount is $15 million per individual and is indexed for inflation in future years under current law. A married couple may be able to use up to $30 million of combined exclusion with appropriate planning, including portability where applicable. Even families well below the federal threshold can face estate-planning issues involving state estate or inheritance taxes, outdated trust provisions, basis planning, and—often overlooked—liquidity.
Consider what a surgeon’s estate may include by age 55 or 60: practice equity, commercial real estate held in a separate entity, deferred compensation, and concentrated investment positions. Those assets may be valuable, but they can be difficult to convert to cash promptly. An estate need not owe federal estate tax to face a liquidity problem. Executors and families may still need funds for state estate or inheritance taxes, debt service, final income-tax obligations, administrative expenses, equalization among heirs, or other estate obligations.
If the estate’s most readily available source of cash is the sale of a medical practice interest or real estate, a time-constrained sale may reduce negotiating leverage and result in less favorable pricing. The question is not simply whether an estate is taxable. It is whether the estate has sufficient accessible liquidity when obligations come due.
Three Sources of Pressure
Some states and the District of Columbia impose estate taxes, and several states impose inheritance taxes. State exemptions, rates, filing deadlines, payment rules, and treatment of life-insurance proceeds vary materially by jurisdiction. As a result, an estate may face state-level transfer taxes even when it owes no federal estate tax.
Probate and estate administration can create a separate form of pressure. Practice-related assets, commercial real estate, business interests, deferred compensation arrangements, and other closely held assets can take time to value, transfer, or sell. Appraisals may be required. Buy-sell agreements, operating agreements, beneficiary designations, and contractual restrictions must be reviewed. Estate-administration deadlines do not necessarily wait for those assets to become liquid.
The practical issue is straightforward: when an illiquid estate needs cash quickly, the family may have fewer choices. That can mean borrowing, selling an asset under an unfavorable timeline, or negotiating with buyers at a time when the family is least prepared to do so.
What an ILIT May Do
An Irrevocable Life Insurance Trust, or ILIT, may help address a specific estate-liquidity need. If properly structured, funded, and administered, an ILIT can own life insurance outside the insured’s federal gross estate when the insured retains no incidents of ownership over the policy. State estate-tax treatment depends on the relevant state’s law and the specific trust and policy arrangement.
Life-insurance death proceeds paid by reason of death are generally excluded from the recipient’s gross income under federal income-tax law. Whether those proceeds are included in a federal or state taxable estate depends on the ownership structure, powers retained by the insured, beneficiary designations, trust terms, and applicable law.
When an ILIT owns a policy, the trustee—not the insured—controls the policy in accordance with the trust document. If the policy is structured and administered appropriately, the trust may provide liquidity that can be used in several ways, including making loans to the estate or purchasing assets from the estate. Those arrangements may provide estate liquidity without requiring an immediate sale of a practice interest, real estate, or other illiquid asset.
The timing of life-insurance proceeds is not guaranteed. If properly documented and the claim is processed promptly, life insurance may provide liquidity more quickly than selling an illiquid asset, but timing depends on the insurance carrier, claim review, trust documentation, beneficiary information, and applicable requirements.
Funding an ILIT
A common ILIT funding method uses withdrawal rights often referred to as Crummey powers. A properly drafted withdrawal power may allow a contribution to the trust to be treated as a present-interest gift eligible for the annual federal gift-tax exclusion. That result depends on the trust terms, meaningful notice, the beneficiary’s actual ability to exercise the withdrawal right, and consistent administration.
For 2026, the federal annual gift-tax exclusion is $19,000 per donor, per donee. Married donors may be able to make up to $38,000 of annual-exclusion gifts per donee through valid gift splitting, generally requiring each spouse to file a timely Form 709 and elect gift splitting.
If trust contributions qualify for the annual exclusion and are properly administered, they generally do not use the donor’s federal basic exclusion amount. Contributions exceeding available annual exclusions may require use of the donor’s remaining exemption, gift-tax reporting, or another funding approach. The appropriate design depends on the premium amount, number of beneficiaries, existing gifts, available exemption, and the family’s broader estate plan.
The Three-Year Rule
Transferring an existing life-insurance policy to an ILIT requires special attention. If the insured transfers an existing policy, or relinquishes incidents of ownership over a policy, and dies within three years, IRC §2035 can cause the policy proceeds to be included in the insured’s federal gross estate.
One commonly considered approach is to have an independently acting ILIT apply for and initially own a new policy. This can avoid the particular three-year transferred-policy issue, provided the insured does not retain incidents of ownership and the arrangement is properly implemented. That is not a substitute for legal review. The policy application, trust language, premium-funding process, trustee independence, and ongoing administration all matter.
The timing decision should be evaluated with qualified estate-planning counsel before a policy is applied for, transferred, or funded.
The Tradeoffs
An ILIT is not free, and it should not be presented as a universal solution.
There are initial costs for trust drafting, insurance underwriting, and coordination among the attorney, insurance professional, trustee, and financial-planning team. There can also be ongoing costs for trustee services, tax reporting, administration, and delivery and retention of withdrawal notices.
More important, the arrangement involves a meaningful loss of flexibility. The insured generally should not retain powers over the policy that could constitute incidents of ownership, such as the ability to change beneficiaries, borrow against the policy’s cash value, surrender the policy, assign the policy, or otherwise control its economic benefits. The trust’s powers, the trustee’s authority, and beneficiary rights should be carefully drafted and reviewed.
An ILIT should therefore be evaluated as part of an integrated estate plan, not as a standalone insurance purchase.
When an ILIT May Merit Review
An ILIT may merit evaluation for surgeon families in several circumstances:
A practice-heavy estate in which business equity or commercial real estate represents a substantial share of family wealth and cannot be sold quickly without disrupting value or operations.
A blended-family situation in which the family wants to provide for a surviving spouse or children outside the practice while preserving business ownership for an heir or successor who will remain involved.
A family subject to state estate or inheritance-tax exposure, where properly structured life-insurance liquidity may help the trustee or beneficiaries address estate obligations.
An estate with substantial deferred compensation, concentrated investments, real estate, debt obligations, or other assets that may not be readily liquid at death.
A fully liquid estate with no meaningful federal or state transfer-tax exposure, no business-succession concerns, and no family equalization issues may not need an ILIT. That can be an appropriate conclusion.
Financial planning is not simply about accumulating assets. It is also about making sure that a family has workable choices when those assets must be administered, transferred, or divided. For the right family, estate liquidity planning can reduce the risk of a forced sale, preserve negotiating flexibility, and help surviving family members manage obligations without making major decisions under unnecessary time pressure.
Capably Yours,
Jared
DISCLAIMER
This article is for informational and educational purposes only and does not constitute investment, tax, or legal advice. It does not take into account the specific objectives, financial situation, or needs of any particular person. You should consult your own tax, legal, and investment professionals before acting on any information contained herein. Capable Wealth, a New York registered investment adviser, provides advisory services only where properly licensed or exempt from licensing.