$2M Life Insurance Policy: ILIT vs. Owning It Yourself Under the $15M Federal Estate Tax Exemption (and a $1M State Exemption)

Picture this. It's 2024, you're 45, and your advisor tells you the federal estate tax exemption is about to be cut roughly in half. Your $2M life insurance policy could land in your taxable estate, so you set up an irrevocable life insurance trust (ILIT), pay a lawyer, and move on.

Then the law changed. As we understand current law, the 2025 tax legislation set the federal exemption at $15M per person starting in 2026 (about $30M for a married couple using portability), indexed for inflation after that, with no scheduled sunset. Please confirm the current figures with your attorney before acting.

So the question worth asking is: is my policy owned the right way for the estate I actually have? For some families the answer is "you're fine, and the trust is costing you money." For others it's "you're exposed to a $240,000 or $800,000 bill." The difference depends on a handful of your own numbers, and I'll show you which ones.

The One Rule Behind All of This

Life insurance death benefits are generally income-tax-free to your beneficiaries. That part is simple and stays true. But income-tax-free is not the same as estate-tax-free.

If you own the policy, or hold what the tax code calls "incidents of ownership" (the right to change the beneficiary, borrow against it, or cancel it), the death benefit counts in your taxable estate. A $2M policy sitting on top of your other assets can push you over an exemption line.

An ILIT changes who owns the policy. When the trust owns it and you don't, the proceeds can sit outside your estate. Two catches:

The three-year rule. If you transfer an existing policy into the trust and die within three years, the proceeds get pulled back into your estate. A policy the trust buys new doesn't have this problem.
It's irrevocable. You can't change your mind about the beneficiaries or take the policy back.

Whether any of that is worth doing depends on two questions: how big is your estate, and which taxes apply where you live?

Four Scenarios, One $2M Policy

Here are four illustrative examples I built to show the mechanics. Your numbers will differ, so treat these as a template. For scenarios B through D, assume the second death of a single owner or surviving spouse, with the estate figure shown excluding the policy.

Scenario	Estate (excl. policy)	Exemption that applies	Tax if you own the $2M policy	Tax if an ILIT owns it	What the ILIT saves
A: Married couple, both 44	$6M	About $30M federal (with portability)	$0	$0	$0
B: Single, state with $1M exemption	$3.2M	$1M state (federal is not an issue)	About $504,000 state	About $264,000 state	About $240,000
C: Single, federal exposure	$14M	$15M federal	$400,000 federal	$0	$400,000
D: Single, larger estate	$20M	$15M federal	$2.8M federal	$2.0M federal	$800,000

The math behind each row:

A: $6M plus $2M is $8M, far below any federal exemption. An ILIT here solves a problem you don't have.
B: With the policy in your name, $3.2M + $2M − $1M exemption = $4.2M taxable. At an assumed flat 12% effective rate, that's $504,000. With the ILIT, $3.2M − $1M = $2.2M taxable, or $264,000. Real state schedules are graduated (Oregon, for example, has a $1M exemption with rates that climb into the mid-teens), so run your own state's table.
C: $14M + $2M = $16M. The taxable amount is $1M over the $15M line, times 40%, or $400,000. Outside the estate, you're at $14M and owe nothing.
D: Once you're already over the line, every policy dollar is taxed at 40%. $2M × 40% = $800,000.

The rule of thumb: the ILIT saves you roughly death benefit × your marginal estate tax rate, but only if the policy is what pushes you over an exemption. If you're far below every threshold, the saving is zero.

Don't forget the cost of the trust. Assume roughly $4,000 to set up and $1,500 a year to administer for 20 years, about $34,000 total. In Scenario B that's a strong trade ($240,000 saved for $34,000). In Scenario A you're spending $34,000 to save nothing.

The kind of analysis that decides between A, B, C, and D is what Morivex runs for you, so you don't have to build the spreadsheet yourself.

"But I Don't Know What My Estate Is Worth"

Most people underestimate it, because they count the house and the bank account and forget everything else. Add these up:

Home equity (not just the down payment you remember)
401(k), IRA, and other retirement accounts
Brokerage and savings
Business ownership value
Any life insurance you own, including group coverage where you hold ownership rights
Real estate, vehicles, and other property

Then find out whether your state has its own estate or inheritance tax. Several do, and some start at exemptions far below the federal $15M. The state tax is why Scenario B exists.

If your total is comfortably under both lines, the estate-tax-driven reason for an ILIT largely disappears. The reasons to own life insurance don't. They're just no longer about tax.

Then Ask the Coverage Question: Do You Have Enough?

An ILIT can't rescue a policy that's too small. Before worrying about ownership, calculate how much your family needs. The DIME method (Debt, Income, Mortgage, Education) is a good start. Our walkthrough, How to Calculate Exactly How Much Life Insurance Your Family Needs Using the DIME Method, shows the arithmetic.

An estate-tax-heavy plan often needs a different question: will my family have cash when the bill arrives? If most of your wealth is a farm, a business, or real estate, an estate tax bill (or a forced sale) can arrive before anyone can raise liquidity. That's where permanent coverage owned by a trust can make sense. For everyone else, a term policy sized to income replacement is usually the workhorse.

Term vs. Whole Life for Wealth Transfer: An Illustrative Comparison

Here's a rough comparison for a healthy 45-year-old buying $1M. The premiums are illustrative assumptions, not quotes. Get real ones before deciding.

	20-year term	Whole life
Assumed annual premium	$1,700	$17,000
Total premiums, 20 years	$34,000	$340,000
Coverage at age 65	Expires	Still in force
Assumed cash value at year 20	$0	About $265,000
Premium difference invested instead	About $15,300 a year	n/a

If you take that $15,300 annual difference and invest it at an assumed 5% for 20 years, you'd have roughly $506,000 (15,300 × 33.07, ignoring taxes and fees). Compare that with the assumed $265,000 of cash value.

So the "buy term and invest the difference" path builds more raw wealth in this example, but it comes with a big if: you have to actually invest the difference, every year, for 20 years. The whole life path gives you something the term path doesn't, a $1M death benefit that still exists at 85.

Whether that lifetime benefit is worth $306,000 more in premiums depends on whether you need liquidity for an estate tax bill at 85. If your estate is under every exemption line, you probably don't. If you're in Scenario C or D, you might. I don't push either product. For a fuller side-by-side, see $1M Term vs. Whole Life vs. Universal Life at 35: The 30-Year Cost Comparison.

You can model this for your specific situation at Morivex.

The Ownership Mistakes That Hide in Old Paperwork

This is where I'd like you to pull out your documents.

Trust language written for a different law

Many wills and trusts written in the years before the exemption rose contain formula clauses: "leave the maximum amount that avoids federal estate tax to the credit shelter trust, and the rest to my spouse." When the exemption was $1M or $3.5M, that was fine. At $15M, that same clause might route millions of dollars into a trust your surviving spouse doesn't control, when you meant to leave it to them outright. Have an attorney read your formula clauses against current numbers.

An ILIT that no longer matches your plan

If you set up an ILIT because of the sunset scenario, it's worth checking whether your estate and state actually justify it. We covered the ownership mechanics in $2M Life Insurance Policy in an Irrevocable Trust vs. Your Own Name. Some of our earlier posts on this topic were written when the exemption was expected to fall, so use the ownership mechanics and rerun the dollar figures against today's law.

A beneficiary who drifted

Divorce, remarriage, a new child, or the death of the person you named can all leave your beneficiary form pointing at the wrong person. A policy paid to a minor child directly, or to an ex-spouse, can be a bigger practical problem than any estate tax. We walk through this in $800K Life Insurance Bought at 35, Now 45.

Coverage that drifted from its original purpose

There's a useful parallel in a commercial insurance story. In "Unpacking Warehouse Legal Liability" (Insurance Journal), the author describes a line that historically had many gray areas and multiple interpretations, and that strayed from its original intent during the recent soft market. Your personal policies can drift the same way: a rider you bought for one reason, a trust drafted for a tax threshold that no longer applies, a beneficiary designation nobody has read since the mortgage was smaller. The fix is the same: read the definitions and check the purpose against your life today.

Check the Carrier, Especially If the Policy Is Meant to Outlive You

A trust that owns a policy is counting on the insurer to be around when the claim arrives, maybe 40 years from now. That's why the carrier's financial strength matters.

In "AM Best Revises Outlook to Positive for Oklahoma's Triangle Insurance Company" (Insurance Journal), AM Best moved the outlook to positive from stable and affirmed a Financial Strength Rating of A- (Excellent). Triangle is a property and casualty insurer in Enid, Oklahoma, so it isn't a life carrier you'd shop, but the article shows how to read a rating:

The letter grade is the current opinion of financial strength.
The outlook (positive, stable, or negative) is the likely direction over the next one to three years.
A- is the fourth rung on AM Best's scale, and still "Excellent."

For a long-dated policy, look at both the rating and the outlook on the specific carrier issuing yours, and recheck them every few years.

When the Review Turns Up Something Uncomfortable

Suppose you run your numbers and find that the ILIT you bought is unneeded, or that your formula clause misfires, or that you're underinsured. That's a hard conversation to have with yourself, and a harder one for the advisor who has to deliver it.

The Kitces Nerd's Eye View episode "Breaking Bad News To A Client About Prior Problematic Financial Decisions: Kitces & Carl 199" is aimed at advisors, but it makes a point every client benefits from. When an advisor takes on a new client, they're analyzing a lifetime of financial decisions, and most people have made a few suboptimal ones. That's normal. A plan built under the old rules is not a personal failure, and finding a fixable gap now beats finding it at the worst possible moment.

Also consider who is holding your file. In "A 4-Step Guide To Reducing Advisor Turnover By Recruiting Career Changers" (Kitces Nerd's Eye View), the piece notes that heavy turnover is a real problem in advisory firms, and that McKinsey projects a shortage of more than 100,000 financial advisors. The practical takeaway for you: the person who designed your plan may not be the person managing it in ten years. Keep your own copy of the trust, the policy, and your beneficiary forms.

Your Recalculation Checklist

Work through these this week:

Total your estate. Include retirement accounts, business value, and any policy you own.
Find your state's exemption. Federal isn't the only tax.
Compare against $15M (or $30M for a married couple with portability, using current figures).
Check who owns each policy and who the beneficiary is.
Read your trust and will for formula clauses tied to the exemption.
Recalculate your coverage need using income, debts, mortgage, and dependents, not the estate tax alone.
Look up your carrier's AM Best rating and outlook.

In three of my four scenarios the ownership structure mattered, and in one it didn't. You won't know which one you are until you put your own numbers in.

Run Your Own Numbers

This article can't tell you whether you're Scenario A or Scenario D. Your age, dependents, income, debts, estate value, state, and existing coverage decide that. If you'd like to see it laid out, Morivex lets you work through your coverage need and ownership questions with your own inputs, so you can walk into a conversation with your attorney or planner knowing what to ask.

This article is educational, not legal, tax, or financial advice. Tax law and state rules change, and every example above uses assumed figures. Confirm your situation with a qualified estate attorney and tax professional.

Sources

Unpacking Warehouse Legal Liability — Insurance Journal
Citi Adds Japan Airlines as Its Newest Transfer Partner — NerdWallet
AM Best Revises Outlook to Positive for Oklahoma’s Triangle Insurance Company — Insurance Journal
Breaking Bad News To A Client About Prior Problematic Financial Decisions: Kitces & Carl 199 — Kitces Nerd's Eye View
A 4-Step Guide To Reducing Advisor Turnover By Recruiting Career Changers — Kitces Nerd's Eye View