A $1M Policy Outside Your Estate Saves $400K — for a $24,750 Setup Cost

A policy you own is a policy your estate owns too

We ran a common scenario through the calculator: a $1,000,000 life insurance policy, a 40% combined federal-plus-state marginal estate tax rate, a $6,000 setup cost, and $750/year in administration cost over a 25-year horizon. Owned personally, that policy's death benefit adds $1,000,000 to the taxable estate — at a 40% marginal rate, $400,000 in additional estate tax. Moved into an ILIT, that $400,000 is saved entirely, against a total administration cost of $24,750. The net benefit — $375,250 — comes from a mechanic most people don't realize applies to insurance they've owned for years: the death benefit isn't automatically outside the estate just because it goes to a named beneficiary.

The math only works if the estate is actually exposed to estate tax in the first place — for the roughly 99.8% of estates under the 2025 federal exemption ($13.99M individual), moving a policy into an ILIT saves nothing on estate tax at all, though state-level exposure (much lower thresholds in 12 states) can still make it worthwhile.

How the math works

Estate tax saved = death benefit × combined marginal estate tax rate. Total administration cost = setup cost + annual administration cost × years until death. Net benefit = estate tax saved − total administration cost.

Source: IRC §2042 (life insurance proceeds includible in the gross estate when the insured retains incidents of ownership), IRC §2035(a) (the 3-year lookback rule for a policy transferred into a trust shortly before death).

Math runs locally. Inputs never leave your browser.Source on github.

Where this calculation doesn't apply

• Your estate is under the exemption.If federal + state exposure is zero, an ILIT saves nothing on estate tax — the policy's death benefit was never going to be taxed regardless of who owns it.
• An existing policy transferred within 3 years of death.The 3-year lookback rule pulls the death benefit back into the taxable estate if the insured dies within 3 years of transferring an existing policy into the trust — a newly-purchased policy funded directly through the ILIT avoids this entirely.
• You might need to change the beneficiary or borrow against cash value later.Irrevocable means irrevocable — once the trust owns the policy, you generally can't reclaim control, regardless of how your circumstances change.
• The policy is small relative to the setup and administration cost.Below a certain size, the fixed costs of maintaining an ILIT outweigh the tax savings — the breakeven figure this tool reports shows exactly where that line is for your own numbers.

What to actually do

1. Run the Estate Tax Exposure tool first to get a realistic combined marginal rate — an ILIT saves nothing if that rate is 0%.
2. If setting up a new policy, purchase it directly through the ILIT rather than transferring an existing one, to avoid the 3-year lookback risk entirely.
3. Get a real attorney-fee quote for drafting and funding the trust, and ask about ongoing Crummey-notice administration requirements.
4. Understand the irrevocability trade-off fully before committing — this isn't reversible if your circumstances change.
5. Revisit the math if your estate's exposure changes materially (a large inheritance, a business sale, a change in the federal exemption).