Over your career as a CPA practice owner, you’ve likely built up a variety of financial assets – from retirement accounts to maybe a couple of insurance policies. As retirement approaches, it’s natural to wonder if you’ve structured everything optimally. One area that often flies under the radar is how your insurance policies are owned. In modern retirement planning, especially for those of us eyeing estate and legacy issues, deciding what insurance policies should go in trusts can be as important as choosing the right investments.
You purchase insurance to protect your family and provide for the future. But if not planned correctly, the very payout from an insurance policy could unintentionally cause tax headaches or distribution issues for your heirs. Placing certain policies in a trust can help sidestep those problems and ensure your insurance truly fulfills its purpose. Let’s explore which insurance policies make sense to hold in trusts – and why this strategy might be a smart addition to your retirement toolkit.
Why Consider Putting Insurance Policies in a Trust?
Trusts aren’t just for the ultra-wealthy with mansions and dynastic fortunes. They’re practical estate planning tools that give you more control, protection, and tax efficiency over your assets, including insurance policies. When you place an insurance policy into a properly structured trust, a few key benefits often emerge:
- Estate Tax Reduction: The policy’s proceeds can be kept outside of your taxable estate. This means when the insurance pays out, that money isn’t lumped into the value of your estate for estate tax purposes. For high net worth individuals, this is crucial as it prevents a life insurance payout from triggering or increasing estate taxes. We’ll dive deeper into estate taxes in a moment (especially with the new laws in 2025 raising exemptions), but the headline is that a trust can shield insurance proceeds from the IRS.
- Probate and Privacy: Assets that pass through a trust avoid probate court, which simplifies and speeds up distribution to your heirs. Life insurance usually bypasses probate if you’ve named a beneficiary, but if your estate is the beneficiary or you want more control via a trust, the trust route can ensure the process stays private and efficient. Your family won’t have to slog through court proceedings for the insurance money – it will be managed and distributed according to the trust instructions.
- Control and Legacy Wishes: With a trust, you call the shots on how and when the insurance money is used. Want the funds to cover your grandkids’ education or provide steady income to your spouse? Or ensure that a spendthrift heir doesn’t blow it all at once? A trust can enforce those wishes. Unlike a direct payout to a beneficiary, which they could spend however they please, a trust can dole out the money under the terms you set. In short, it lets you rule from the grave (in a helpful way!) by providing structure and guidance for the insurance proceeds.
- Creditor and Lawsuit Protection: Assets inside certain trusts are often shielded from creditors and legal judgments. If you work in a field with lawsuit risk (doctors, attorneys, and yes, sometimes business owners like CPAs can be targets), putting a valuable insurance policy in an irrevocable trust can add a layer of protection. Creditors or litigants generally can’t claim the insurance cash value or death benefit if the policy is owned by an irrevocable trust and not you personally. Similarly, if your heirs have creditor issues or divorce concerns, the trust can safeguard the insurance proceeds from those external claims.
In essence, the right trust can act like a protective container for an insurance policy: keeping it out of reach of taxes, courts, and creditors, until it’s time to deliver the benefits to your loved ones. Now, let’s zero in on the type of trust most commonly used for this purpose: the life insurance trust.
Life Insurance and ILITs: The Basics
When people talk about putting insurance in a trust, they’re usually referring to life insurance and a specific kind of trust known as an Irrevocable Life Insurance Trust (ILIT). An ILIT is an irrevocable trust set up with a life insurance policy as the asset. You create a trust, and that trust becomes the owner (and often the beneficiary) of a life insurance policy on your life. You are the insured, but you no longer own the policy – the trust does!
By giving up ownership, you’re excluding the policy from your estate. When structured properly, the life insurance proceeds will pass to the trust and then to your beneficiaries without being counted as part of your estate value. For wealthy individuals, this means your heirs can receive the insurance money tax-free.
How ILITs Transform Estate Planning
Understanding the strategic transfer of life insurance ownership to maximize estate benefits
You as the Insured
You remain the person covered by the life insurance policy, but you transfer ownership to create estate advantages
ILIT Trust Ownership
The irrevocable trust becomes the owner and beneficiary, removing the policy from your taxable estate
Estate Tax Considerations for CPAs
As a successful CPA practice owner, your business value and investment portfolio may push you into estate tax territory. Current federal exemptions are substantial, but they're scheduled to decrease, making ILITs increasingly relevant for wealth preservation.
The key benefit: Life insurance proceeds pass to your heirs completely tax-free when properly structured through an ILIT.
Estate Exclusion
Policy proceeds bypass your estate entirely, avoiding potential estate taxes
Beneficiary Control
Trust terms dictate exactly how and when beneficiaries receive proceeds
Liquidity Solution
Provides cash to pay estate taxes or equalize inheritances among heirs
Before we talk about which specific policies should go into a trust, let’s address the elephant in the room: estate taxes. Not everyone needs to worry about federal estate taxes, especially with recent changes in the law. But if you’re a CPA practice owner who has built a valuable business and portfolio, you need to keep an eye on the estate tax landscape – it directly impacts whether a life insurance trust is necessary or merely helpful for peace of mind.
Estate Tax Exemptions and the 2025 Law Change
You’ve probably heard the buzz about estate tax exemptions being high right now. In fact, we’re in a historically high exemption period. Since 2018, the federal estate tax exemption has been over $11 million per person (it was doubled as part of tax reforms). Each year, it has crept up with inflation, reaching $12.92 million in 2023 and about $13.61 million in 2024. In 2025, it’s $13.99 million per individual. That means a married couple can protect roughly $27.98 million from federal estate tax – an amount that covers most Americans quite comfortably.
Originally, these generous exemptions were set to sunset (i.e., drop back down) after 2025. We were bracing for the exemption to fall to around $5–7 million per person in 2026, which could have suddenly roped a lot more people (including many successful business owners) back into the estate tax net. However, a significant change just occurred. In July 2025, a new law dubbed the “One Big Beautiful Bill Act” was signed, and it permanently raised the federal estate tax exemption going forward. Starting in 2026, the exemption will be $15 million per person (indexed for inflation from 2025 onward) instead of dropping to ~$7 million.
Which Insurance Policies Should Go in Trusts?
Not every insurance policy needs a trust. In fact, many types of insurance (like health insurance or disability insurance) provide benefits directly to you during life – those wouldn’t involve a trust at all. When we talk about insurance in trusts, we’re almost always talking about policies that pay a benefit upon death or that have a cash value component that contributes to your estate. Let’s break down the key candidates:
Should Your Insurance Policy Go in a Trust?
Interactive Decision Tool for CPAs
1 Select Your Insurance Policy Type
📊 Estate Tax Threshold
2024: $13.61M per person
2026+: May drop to ~$7M
⏰ 3-Year Rule
Transferred policies must survive 3 years to be excluded from estate
💡 ILIT Benefits
Estate tax savings, creditor protection, distribution control
1. Permanent Life Insurance (Whole Life, Universal Life, etc.)
If you have a permanent life insurance policy (one that is designed to last your entire life and not just a term), this is often the top candidate for an ILIT. Permanent policies typically accumulate cash value and have substantial death benefits. People often purchase them for estate planning, business succession, or long-term family support. For CPA owners, you might have a whole life policy as part of a buy-sell agreement funding or as an additional investment/savings vehicle.
These policies should be considered for a trust if your estate could be taxable or if you want to control the distribution. Because permanent insurance will pay out at some point (whenever you pass away, which hopefully is many years down the line), we know there’s going to be a death benefit – and if that benefit is, say, $5 million or $10 million, it could create a tax issue or at least a distribution challenge. Putting the policy in an ILIT ensures that a large payout is tax-free to your heirs and managed per your instructions.
2. Term Life Insurance
Term life policies are a bit more debatable for trusts. Term insurance covers you for a set term (e.g. a 20-year term policy you bought to cover your family while your kids were young, or to cover a business loan). If you outlive the term, the policy ends and never pays out. Because of this, some people think it’s not worth the hassle to put a term policy in an ILIT – after all, if it expires before you die, the trust was somewhat moot. However, there are situations where a term policy should be in a trust. Example: you’re 60 years old with a $3 million term policy that expires when you’re 70. Your net worth is already near the estate exemption. If you were to die unexpectedly while the term policy is in force, that $3M would be added to your estate and could trigger taxes. If that policy were in an ILIT, the $3M would pass outside the estate.
Alternatively, some term policies are convertible to permanent insurance. If you think you might later convert that term into a permanent policy (to extend coverage or for estate reasons), it could be wise to start it out in a trust or transfer it while you’re still in good health (remember the 3-year rule if transferring an existing policy – so doing it sooner than later is key). So, consider an ILIT for large term policies if the death benefit would cause estate tax issues or if the term policy is part of your long-term plan (conversion to permanent, etc.). On the other hand, if you have a small term policy just for, say, covering a mortgage or for a key-person insurance for the business that will end, you might not bother with a trust for those.
3. Second-to-Die Life Insurance (Survivorship Policies)
Survivorship life insurance insures two lives (usually you and your spouse) and pays out after the second person passes away. These policies are often specifically used in estate planning for married couples – they create a pot of money for the children or heirs, often to pay estate taxes or equalize inheritances once both parents are gone. If you have a survivorship policy and you foresee a taxable estate, it almost always should be held by an ILIT.
The reason is simple: the policy is explicitly there to provide liquidity for estate taxes or to support heirs, so you definitely don’t want its proceeds to be taxed or tied up. By using a trust, when that second death occurs, the insurance money flows into the trust and can immediately, for example, pay the estate tax bill (which comes due within nine months of the second death) without being itself diminished by tax. In other words, a trust lets the survivorship policy do its job – provide cash exactly when needed – with maximum efficiency cparetirementsolutions.com.
4. Life Insurance for Business Succession or Key Person Needs
As a CPA practice owner, you might have insurance in place to protect your business. For instance, a buy-sell agreement between partners might be funded by life insurance – each partner’s policy provides cash for the others to buy out their share if one dies. Or you might have key person insurance on yourself that would provide the firm funds to hire a replacement or cover losses if you unexpectedly pass.
Generally, those policies are owned by the business or other partners (not by you personally), so they wouldn’t be in your personal trust. An ILIT is usually for personal life insurance that you own. If a policy is business-owned (company is the beneficiary), it’s outside your estate by definition (you don’t own it). So, for key person or buy-sell policies, a trust is usually not involved in the conventional sense. The business structure and agreements dictate those. The focus for ILITs is your personal life insurance that is part of your estate.
5. Annuities and Other Insurance-Like Assets
What about annuities or other types of insurance products? Generally, annuities (tax-deferred investment contracts with an insurance company) are not placed into an ILIT during your life because annuities owned by a non-natural person (like a trust) can lose their tax-deferred status. There are some niche scenarios where a trust might be the beneficiary of an annuity – for example, a trust for a child could be named to receive annuity payments after you die, to provide structure to those payouts. But those are more about benefiting management, not tax avoidance. Annuities don’t create estate tax concerns the way large life insurance policies do (the value of an annuity is included in your estate whether you own it or a trust does, unless you irrevocably assigned it, which is uncommon). So, we typically don’t use ILITs for annuities.
Similarly, retirement accounts (401ks, IRAs) generally should not be owned by a trust while you’re alive – they have their own set of beneficiary rules and tax implications. You might name a trust as a beneficiary for an IRA if you have specific needs (like a special needs trust or minor beneficiaries), but that’s a separate topic and not about insurance per se.
The prime candidates for trust ownership are life insurance policies, especially those with large death benefits that would push your estate over tax thresholds or those intended for long-term family support or estate liquidity. Permanent life insurance is at the top of the list for ILIT consideration, with term policies and survivorship policies also being common contenders if they’re sizeable.
Other insurance types (health, disability, property & casualty) don’t factor in here, since they don’t have a post-death benefit to worry about in your estate. And assets like annuities or retirement plans follow different rules and typically are handled outside of trusts for tax reasons.
Conclusion
To recap, life insurance is the main policy type that can often benefit from trust ownership, especially if your estate might be exposed to estate taxes or if you have specific wishes for how that insurance money should be used. By using an Irrevocable Life Insurance Trust, you ensure that your life insurance does exactly what it’s meant to do – support your loved ones – without unintended side effects like estate taxes, probate delays, or mismanagement of funds. It carves out a protected space for those insurance proceeds to live, separate from your other assets and the reach of creditors or the IRS. And even with today’s high estate tax exemptions courtesy of the 2025 law, there are plenty of scenarios (future law changes, state taxes, large insurance needs, etc.) where an ILIT remains incredibly relevant.
If you’re reading this and wondering how it all applies to you, take a moment to tally up the coverage you have and your current net worth. Is there a chance your total estate (including insurance) could exceed ~$15 million (or whatever the exemption is by the time you read this)? Do you have a business or property that your heirs would need to sell if cash were tight? Are you concerned about protecting assets from potential lawsuits or keeping a smooth legacy for your family? These are the prompting questions that might nudge you toward the ILIT strategy.
If you think an ILIT or other trust might be the missing piece in your retirement plan, don’t hesitate to reach out for a consultation. We can help you evaluate the fit and coordinate with estate planning attorneys to get it done right. With the right planning, you can step into retirement confident that you’ve not only built wealth, but also protected it in all the right ways for those you care about.
