Phil and Terry McMillan’s family story began when Phil’s parents built a small neighborhood grocery into a regional chain. Over time, most of their net worth became concentrated in the closely held business, which created a classic liquidity problem: substantial value on paper, but limited cash available at death. Their estate attorney explained that the federal estate tax calculation looks broadly at the gross estate, and that life insurance can be pulled into that gross estate in certain situations—especially if the insured kept control rights over the policy. That “control rights” concept is not marketing language; it is explicitly addressed in federal estate tax rules under IRC §2042 and the IRS’s estate tax return instructions for Form 706. Legal Information Institute+2IRS+2
Their advisor recommended an Irrevocable Life Insurance Trust (ILIT) as the ownership structure for a new life insurance policy, so the policy would be owned by a trust rather than by Phil’s parents personally. The technical reason this matters is that the IRS focuses on whether the decedent held any incidents of ownership—such as the power to change beneficiaries, assign the policy, pledge it for a loan, or borrow against cash value—because those powers can cause the death benefit to be included in the taxable estate. The IRS spells out these “incidents of ownership” examples in the Form 706 instructions, and the Treasury regulations expand on how incidents can apply even when a policy is held in trust if the insured retains certain powers. In other words, the structure must be drafted and administered so the insured does not retain prohibited control, and that requirement is grounded directly in IRS guidance and Treasury regulations. IRS+2Legal Information Institute+2
Because no one can reliably predict how long people will live—or when a death-triggered liquidity need might arrive—Phil’s parents treated the ILIT as a risk-management tool, not just a tax strategy. Global longevity trends reinforce that estate plans must be durable over long time horizons, because many people can expect to live into their sixties and beyond, and demographic aging is accelerating. That longevity reality increases the odds that business value, real estate, and investment assets can compound for decades, sometimes turning a “comfortable” estate into a taxable one depending on future law. This is why the family’s attorney emphasized using a structure that works under the rules as written (statute + regulation), not a structure that depends on optimistic assumptions. World Health Organization+2Legal Information Institute+2
They also addressed governance risk by selecting a professional trustee rather than naming one child to manage everything. The goal was to reduce family friction and to ensure the trust administration stayed consistent with the document over time, including premium funding mechanics and distribution rules. As a practical consumer-protection point, the NAIC reminds policyowners that beneficiary and trust arrangements should be set up carefully with qualified advisors, because wording and ownership details can create unintended consequences if handled casually. That guidance fits the McMillan family’s decision to treat documentation and administration as part of the “product,” not an afterthought. NAIC+2IRS+2
When Phil’s parents died, the life insurance proceeds provided immediate cash, and the ILIT’s trustee used that liquidity to stabilize the estate plan’s outcome. The estate tax return process explicitly requires listing life insurance policies and explains when proceeds are includible—particularly when the proceeds are payable to the estate or when the insured retained incidents of ownership at death. This is exactly the kind of situation the ILIT is commonly designed to address: providing liquidity that can be used to pay costs, equalize inheritances, and avoid forcing a distressed sale of a family business. The American College of Financial Services describes this liquidity role directly—an ILIT can receive proceeds and then lend to, or buy assets from, the estate to create liquidity without pulling the policy proceeds back into the taxable estate when properly structured. IRS+1
One additional legal guardrail mattered in their implementation timeline: if an existing policy is transferred into an ILIT and death occurs within a short window, inclusion risk can return under federal rules. Specifically, the “three-year rule” in IRC §2035 can pull value back into the gross estate when certain transfers or relinquished powers occurred within three years of death, including transfers that would have been includible under §2042 if retained. This is why competent planning often coordinates ownership, timing, and administration as one integrated system rather than a quick beneficiary change. In practice, that means the “how” and “when” can be just as important as the “what.” Legal Information Institute+2Legal Information Institute+2
You’ll see these highlighted terms in the case study above and below because they are either commonly included in advanced insurance glossaries or are strong candidates to ensure are included in your 1,200-term library. These terms are central to ILIT suitability, compliance, and policy design, and they routinely appear in IRS materials, regulations, and professional planning education. Including them improves “findability” for advisors who search by technical phrase rather than by acronym. The keywords section at the end gives you a short “searchable set” to tag into your glossary workflow.
An Irrevocable Life Insurance Trust (ILIT) is a trust designed to own a life insurance policy (or to receive its proceeds) so that, when properly structured, the policy’s death benefit is generally not included in the insured’s taxable estate. The tax logic ties directly to federal law: IRC §2042 includes life insurance proceeds in the gross estate if the proceeds are payable to the estate, or if the insured retained incidents of ownership at death—such as the power to change beneficiaries, assign the policy, pledge it, surrender it, or borrow against it. The IRS Form 706 instructions and Treasury regulations provide concrete examples of these incidents and explain how retained powers can trigger inclusion even when a policy is held in trust. IRS+2Legal Information Institute+2
In an ILIT plan, the trust is typically the policy owner and beneficiary, and an independent trustee administers the trust under written terms for premium payments and distributions to beneficiaries. The ILIT is “irrevocable,” meaning the grantor generally cannot unilaterally change or undo the trust, which supports the separation needed for estate tax purposes. Timing matters: under IRC §2035, certain transfers or relinquished powers within three years of death can bring the policy back into the estate, so implementation must be coordinated with competent legal and tax advisors. Properly used, an ILIT is primarily a control-and-liquidity tool—helping provide cash at death, stabilize a family business outcome, and direct benefits in a disciplined way. Legal Information Institute+2The American College+2
Life insurance can be included in the gross estate if the proceeds are receivable by the estate or payable for the estate’s benefit, or if the insured retained incidents of ownership at death. The statute is IRC §2042, and it is operationalized through the IRS estate tax filing framework, including the Form 706 instructions for Schedule D, which lists the incidents of ownership examples (change beneficiary, assign, pledge, borrow, surrender, etc.). Treasury regulations further clarify that “incidents of ownership” is broader than technical title and can apply through retained powers or certain trust-related control. Legal Information Institute+2IRS+2
It means the IRS cares about control—who can push the buttons that change the economic outcome of the policy. The IRS and Treasury describe incidents of ownership as rights like changing the beneficiary, surrendering the policy, assigning it, pledging it, or borrowing against its cash value. If the insured possesses any of those powers at death (even jointly with someone else), the death benefit may be pulled into the taxable estate under the federal estate tax rules. IRS+2Legal Information Institute+2
Because timing can undo the intended separation if an ownership change happens too close to death. Under IRC §2035, if the decedent transferred an interest or relinquished a power within three years of death—and the property would have been included under sections including §2042 if retained—then the value can be included in the gross estate. In ILIT terms, this is a key reason advisors coordinate whether a policy is newly issued in the trust versus transferred, and why “paper-only” changes without timing awareness can create preventable risk. Legal Information Institute+2Legal Information Institute+2
Estate tax mitigation is a classic use, but liquidity and control are often the more practical reasons families pursue the strategy. The American College of Financial Services describes ILIT proceeds being used to provide liquidity to lend to, or buy assets from, an estate—helping avoid forced sales and supporting planned inheritance outcomes. Separately, consumer-oriented regulatory guidance emphasizes careful beneficiary and trust setup to avoid unintended consequences, which reinforces that governance quality matters, not just “tax savings.” The American College+1
When the product has securities-like risk characteristics, the analysis expands beyond estate tax rules into investment risk, fees, and lapse management. The SEC’s investor education materials warn that variable life policies can lapse if cash value is insufficient to cover fees and expenses, and that the policies are complex with meaningful ongoing charges. If a recommendation involves securities features (or related products like variable annuities), FINRA emphasizes suitability-style considerations, disclosure of surrender charges and fees, and supervisory protections—because complexity can lead to poor outcomes when buyers do not fully understand the tradeoffs. Investor.gov+1
Because the problem is usually the mismatch between growing asset values and the need for cash at an unpredictable time. WHO notes that people worldwide are living longer and population aging is accelerating, which means estate plans often operate over decades, not years. Longer horizons increase the likelihood that a closely held business becomes more valuable and less liquid relative to potential taxes, buyouts, or equalization needs, making “guaranteed-at-death” liquidity a planning tool rather than a luxury. World Health Organization+2IRS+2