Long‑term care (LTC) costs are one of the great threats to both the lifestyle and legacy of today’s aging clients. Even high‑net‑worth individuals who can self‑insure may face significant risks: liquid assets earmarked for care may be subject to estate tax, lose opportunity cost, and may force asset sales at inopportune times.
A creative strategy for addressing this is to use an Irrevocable Life Insurance Trust (ILIT) and fund it with a life insurance policy that can either (a) pay out at death and preserve estate value for heirs, or (b) be structured to provide LTC benefits via a long‑term‑care rider so that care costs don’t erode legacy. Below is a deeper dive into how it works, the benefits, and a brief case study.
How It Works
1. Establish the Trust – The client (grantor) works with counsel to set up an irrevocable trust naming a trustee (not the grantor), beneficiaries, and funding mechanics. Once executed, it is irrevocable.
2. Fund the Trust & Ownership of Policy – The trust becomes owner and beneficiary of a life insurance policy on the grantor’s life.
3. Premium Payments/Gifting – The grantor makes gifts to the trust (using Crummey powers) so the trustee can pay premiums under the annual gift exclusion.
4. Policy Structure & LTC Add‑on – The policy can include a long‑term care rider or hybrid benefit so that if LTC is needed, the policy provides benefits without eroding the estate.
5. Exclusion from Grantor’s Estate – Because the grantor has no ownership, the death benefit is excluded from the taxable estate.
6. LTC Benefit Trigger – If the insured needs LTC, the policy’s rider provides benefits to the trust to cover care costs.
7. Distribution to Beneficiaries – Upon death, proceeds go to the ILIT and are distributed per trust terms to heirs.
Key Benefits
• Estate tax efficiency – Moves life insurance out of the taxable estate, reducing exposure.
• Preservation of legacy – Protects estate assets from LTC costs.
• Flexibility & leverage – Premiums fund a much larger benefit amount.
• Creditor and beneficiary protection – The trust structure provides asset protection.
• Addresses LTC risk – Ideal for affluent households vulnerable to long‑term care expenses.
Important Considerations
• The trust must be properly drafted and funded to avoid inclusion in the estate within three years of transfer.
• The grantor relinquishes control and cannot access cash value.
• Premium funding must be managed carefully with Crummey notices.
• LTC riders and hybrid products have cost and qualification requirements.
Example
Consider a married couple, John and Sarah, both in their late 50s, who have accumulated approximately $30 million in total assets. They anticipate future growth in their estate, which could expose them to estate taxes under changing exemption limits, and they are also concerned about potential long‑term care costs as they age.
Their financial advisor suggests establishing an Irrevocable Life Insurance Trust (ILIT). The trust purchases a $6 million second‑to‑die life insurance policy with a built‑in long‑term care rider. John and Sarah make annual gifts to the trust, allowing the trustee to pay the premiums using funds that qualify for the annual gift tax exclusion.
Years later, Sarah requires long‑term care. The policy’s LTC rider begins paying benefits to the trust, which the trustee uses to cover Sarah’s care expenses. Because the trust owns the policy, the distributions are managed without liquidating other estate assets. This preserves their investment portfolio and real estate holdings.
Upon both of their deaths, any remaining death benefit is paid to the ILIT and distributed to their children and grandchildren, completely outside of their taxable estate. By combining the ILIT structure with an LTC rider, John and Sarah were able to fund potential care needs while preserving their wealth for future generations.
Why This Matters
An ILIT with a life insurance policy, especially one with LTC benefits, helps clients preserve wealth, protect family assets, and plan efficiently for both care and legacy. It’s suitable for clients with significant estates, illiquid assets, or those who value legacy preservation.
Conclusion
An ILIT used to fund life insurance – especially when enhanced with a long-term-care rider or hybrid design – offers a powerful way to protect both legacy and liquidity. It can shift risk from simply “will I have enough assets left at death?” to “how do I ensure care doesn’t consume the estate?” With proper planning, funding and execution, the strategy aligns tax, asset-protection, and intergenerational-wealth goals. The case study above shows how even clients not currently facing estate tax can benefit by acting proactively.