Does life insurance for estate tax liquidity still matter?
By Bill Boersma
I’m regularly surprised by the “It’s sunny now so I’ll never need an umbrella” attitude of people. In the life insurance industry, a portion of the market lives and dies by the prevailing estate tax laws. In one of the most disturbing scenes I recollect from my early career was watching an old timer insurance agent stand up at an industry meeting and push for everyone to reach out to their congressional representatives to advocate for a lower estate tax exclusion so they could keep selling life insurance for estate tax liquidity and business succession. My amazement never ceases regarding the willingness of a business owner, or any wealthy person, to do their planning with no regard to how the world may look 17, 28, 35 or 49 years from today. It’s ridiculous, yet one can be accused of being opportunistic suggesting such. “Of course you’re saying that, you just want to sell life insurance.”
The OBBB, what changed and what didn’t
The One Big Beautiful Bill Act (“OBBB”) signed on July 4, 2025, reshaped the federal transfer-tax landscape and, for now, gives planners a rare window of clarity. Beginning January 1, 2026, the federal estate, gift, and generation-skipping transfer (GST) tax exemptions jump to $15 million per individual (effectively $30 million for a married couple with portability), with inflation indexing thereafter. The top transfer-tax rate stays 40%, and familiar mechanics like portability and the step-up in basis at death remain intact.
- Unified exemption set at $15M in 2026: This permanently avoids the “sunset” cut-back that would have halved the TCJA-era exemption after December 31, 2025. For couples who elect portability on the first death, that’s $30M that can be exempted before any estate tax is due.
- Indexing resumes after 2026: The new exemption will adjust annually, starting with 2027 cost-of-living increases.
- GST tracks the estate/gift exemption: The GST exemption is aligned at the same level, expanding multigenerational trust strategies.
- Rates and basis rules unchanged: The 40% top rate survives; step-up in basis at death is preserved. Gifts continue to carry over basis.
Many families who were racing to use exemption before a 2026 sunset can pause and be more precise. That said, formula clauses pegged to “the applicable exclusion amount” and outdated disclaimers/QTIP terms should be reviewed so the larger exemption doesn’t accidentally over- or under-fund intended bequests or bypass trusts.
If the other party regains power: possible shifts, anchored in recent proposals
“Permanent” in the Code is only as durable as the next statute. If control swings to Democrats, three levers have been floated repeatedly in recent years:
- Lower the exemption (again).
Democrats have previously advanced cuts to the unified credit – either restoring it to $5 million indexed or even $3.5 million for estates with a $1 million standalone gift exemption. Those numbers appeared in 2021 House drafts tied to the Build Back Better Act and in earlier Democratic campaigns. A 2024 proposal referenced a $3.5M estate exemption target. I expect any renewed effort to begin around those benchmarks.
- Change the income-tax treatment at death (step-up under pressure).
The Biden Treasury “Greenbook” repeatedly proposed treating transfers by gift or at death as realization events, taxing built-in gain above exemptions and thereby limiting today’s broad step-up in basis. While Congress didn’t enact it, the blueprint is written, and it could resurface with modified thresholds and carve-outs for family businesses or farms. If enacted, this would not be an “estate tax” change, but it would layer capital-gains tax at death alongside (or in coordination with) the estate tax.
- Clamp down on popular trust and valuation strategies.
Drafts circulated in 2021 would have: (a) pulled grantor trusts (e.g., IDGTs and many ILITs for life insurance) back into the taxable estate for post-enactment funding; (b) taxed sales between a grantor and a grantor trust; and (c) curtailed valuation discounts for non-business/passive assets held in entities (e.g., family LLCs funded with marketable securities). None passed, but they may represent a ready playbook if Democrats return.
Less likely, but still possible: Some progressive proposals have floated higher estate-tax rate brackets above the current flat 40% (graduating up to 45–65% in older bills). That’s been more aspirational than actionable, but if deficits and distributional goals dominate, rate adjustments could join an exemption cut.
What this means for planning in 2025 – 2026
Use the higher exemption while it’s here but build reversibility. Many families will now be under the tax line entirely. For those still above it, or who wish to move appreciation out of the estate, there are still multiple planning options, but drafting with adaptability doesn’t go out of style.
Mind the step-up vs. lifetime gifts trade-off. Because OBBB preserved step-up, you don’t want to over-transfer low-basis assets you plan to hold.
Review ILIT funding and insurance structures. If Democrats revive grantor-trust inclusion or restrict post-enactment contributions, routine premium gifts to ILITs could create estate inclusion for the portion traceable to post-change contributions. Advanced funding and flexible premium schedules deserve a fresh look in 2025–26 to avoid being trapped by a mid-stream rule change.
Life insurance planning considerations
Regarding life insurance planning, there are a number of things to keep in mind that keeps life insurance planning pertinent.
- Plenty of rich people are still above the threshold.
- Death may be a long way off and many are likely growing their estates faster than any indexing.
- Exclusion levels can and do change.
- Term insurance can be a great option tool, especially policies on each spouse convertible to survivor coverage.
- Life insurance not used to pay estate taxes isn’t wasted. It’s still a part of a diversified portfolio that can result in a tangible asset at death.
- Charities and Family Foundations don’t mind life insurance proceeds. I bet I know the answer if you ask them.
- Sure, some people bought life insurance because “they had to” but most evaluated it on a financial basis and it made sense. It doesn’t not make sense simply because a tax isn’t due.
Bottom line
OBBB’s transfer-tax regime is generous and will result in a planning environment that’s calmer than the pre-2026 “use it or lose it” rush many expected. But it is politically contingent. A Democratic swing (whether or not you want it to, you know it’s gonna happen eventually) could plausibly lower exemptions, target grantor-trust mechanics/valuation discounts or even layer capital-gains realization at death. The smart and practical play is optionality: implement strategies that take advantage of today’s rules while preserving the ability to unwind or adapt if tomorrow’s rules move the goalposts.
Sure, take a breath, evaluate everything in light of the new (almost definitionally temporary) law, but don’t for a moment think this is the end of it.
Bill Boersma is a CLU, AEP and LIC and the founder and owner of OC Consulting Group. More information can be found at www.OC-LIC.com, www.BillBoersmaOnLifeInsurance.info or email at bill@oc-lic.com or call at 616-456-1000.
Securities offered through Valmark Securities, Inc. Member FINRA, SIPC. Investment Advisory Services offered through Valmark Advisers, Inc. a SEC Registered Investment Advisor. OC Consulting Group and its affiliates are separate entities from Valmark Securities, Inc. and Valmark Advisers, Inc
This material is for informational purposes only and is not intended to provide specific advice or recommendations for any individual. This information is not intended for use as tax advice. Persons should consult with their own tax advisors for specific tax advice. The information provided has been derived from sources believed to be reliable but is not guaranteed as to accuracy and does not purport to be complete analysis of the material discussed.
