The US federal estate tax applies at 40% on the taxable estate above the applicable exemption — currently at historically high levels but subject to a scheduled reduction. Life insurance owned by the deceased is included in the taxable estate unless held in an Irrevocable Life Insurance Trust. PPLI, as KPMG has noted, is “a potential option to increase one’s after-tax investment returns while providing for transition of assets upon death.” The US is the most sophisticated market globally for the intersection of PPLI and estate planning.

GLOBAL ESTATE PLANNING SERIES

Overview — The Global Landscape
Part 2 — EU Civil Law: France, Germany, Spain and Belgium
Part 3 — The UAE and GCC: Succession Without Estate Tax
Part 4 — Japan and Asia: The World’s Highest Inheritance Tax Rate
Part 5 — The United States: Estate Tax, the ILIT, and Where PPLI Fits (You are here)
Part 6 — South Africa: Estate Duty and the Named Beneficiary Rule

THE US ESTATE TAX: STRUCTURE AND CURRENT POSITION

The basic framework

The United States imposes a federal estate tax on the transfer of a taxable estate. Unlike Japan’s and Germany’s heir-based inheritance tax, the US estate tax is assessed on the estate itself — the total net value of assets owned by the deceased at death — before distribution to beneficiaries. The estate pays the tax; beneficiaries receive the net-of-tax amount.

The federal estate tax rate is a flat 40% on the taxable estate above the applicable exemption. The estate tax is unified with the gift tax — the same exemption applies to lifetime taxable gifts and to the estate on death, aggregated. This is the “unified credit.”

The current exemption and the sunset cliff

The Tax Cuts and Jobs Act of 2017 doubled the estate and gift tax exemption, indexed for inflation. For 2025, the exemption is approximately $13.99 million per individual ($27.98 million for married couples). This means the federal estate tax affects only a small fraction of US estates — those above the exemption threshold.

CRITICAL PLANNING ALERT — SUNSET RISK
The enhanced exemption is scheduled to sunset on 31 December 2025 under existing legislation, reverting to approximately $7 million per individual (indexed for inflation from the pre-TCJA level). As of the date of this publication, the legislative position remains uncertain. KPMG’s 2025 estate planning guidance described the sunset as a “looming” event requiring immediate planning action. Regardless of legislative outcome, the temporary nature of the enhanced exemption creates urgency for UHNWI clients to use available exemptions before any reduction. Advisers should monitor Congressional developments closely.

State estate and inheritance taxes

Seventeen US states and the District of Columbia impose their own estate or inheritance taxes, with exemptions often significantly lower than the federal level. Massachusetts and Oregon, for example, impose state estate tax on estates above $1 million and $1 million respectively. State estate tax is a material consideration for US estate planning, particularly for clients resident in high-tax states.

LIFE INSURANCE AND THE US ESTATE TAX: THE DEFAULT POSITION

Under IRC § 2042, life insurance proceeds are included in the gross estate of the deceased if: (1) the proceeds are receivable by the estate; or (2) the deceased possessed any “incident of ownership” in the policy at the time of death. “Incidents of ownership” include the right to change beneficiaries, the right to surrender or cancel the policy, the right to assign the policy, and the right to pledge the policy as collateral.

This definition is broad. A policyholder who retains any substantive control over the policy — even the right to change beneficiaries — has an incident of ownership, and the death benefit is includable in the gross estate at 40% above the exemption. For a $10 million policy held by a US resident with a $20 million taxable estate, the policy adds $10 million to the estate, potentially generating an additional $4 million in estate tax — a material destruction of the intended death benefit.

THE IRREVOCABLE LIFE INSURANCE TRUST (ILIT)

The mechanism

The Irrevocable Life Insurance Trust (ILIT) is the standard US solution to the estate inclusion problem. An ILIT is an irrevocable trust established for the purpose of owning one or more life insurance policies. Because the trust — not the insured — owns the policy, the insured holds no incidents of ownership, and the death benefit is excluded from the gross estate on death. The proceeds pass to trust beneficiaries free of estate tax.

The mechanics are structurally identical to the UK trust approach: the key element is that legal ownership genuinely rests with the trustee, and the insured retains no control. The ILIT must be irrevocable — the insured cannot later take back the policy or otherwise reclaim ownership.

The Crummey notice

Premiums paid into an ILIT by the insured are gifts for gift tax purposes. To ensure these contributions qualify for the annual gift tax exclusion ($18,000 per beneficiary in 2024, indexed for inflation), the ILIT must include “Crummey” withdrawal rights — a provision allowing beneficiaries a window (typically 30–60 days) to withdraw each year’s contribution. In practice, beneficiaries rarely exercise this right, and its primary function is to convert the contributions into present-interest gifts qualifying for the annual exclusion. Compliance with Crummey notice requirements is a documentation obligation that practitioners must manage carefully.

The three-year look-back rule

If the insured transfers an existing life policy to an ILIT (rather than having the ILIT purchase a new policy directly), IRC § 2035 includes the policy proceeds in the insured’s estate if death occurs within three years of the transfer. This is the US equivalent of the UK’s potentially exempt transfer lookback. The standard approach to avoid this is to have the ILIT purchase the policy at inception — the insured never owns it personally.

PLANNING POINT
ILITs are standard practice for any US estate planning engagement involving life insurance above nominal value. The irrevocability requirement and Crummey notice administration are the primary operational considerations. For UHNWI clients approaching or above the federal exemption — particularly given sunset uncertainty — an ILIT funded with a new policy (avoiding the three-year lookback) and structured with Crummey provisions for annual exclusion gifts is the baseline structure. PPLI-within-ILIT is the premium version of this structure.

PPLI WITHIN AN ILIT: THE PREMIUM STRUCTURE

PPLI held within an ILIT produces a structure where: (1) the ILIT owns the PPLI policy, so the death benefit is excluded from the insured’s gross estate; (2) the investment assets within the policy grow on a tax-deferred basis, free of annual income tax and capital gains tax; (3) the death benefit is paid to the ILIT and distributed to beneficiaries free of income tax; and (4) the policy can provide access to capital via policy loans, which are generally income tax-free.

KPMG’s Family Office Insights on life insurance (2024) confirmed: “PPLI is also generally transparent in terms of its pricing structure, may provide access to cash via loans, generally has no surrender charges, and can eliminate some administrative issues with owning various investments outside a PPLI policy. A common structure is where PPLI is owned by a trust with the insured being a younger family member.”

The combination of ILIT estate exclusion and PPLI tax-deferred growth is the most tax-efficient structure available to US UHNWI clients for multi-generational wealth transfer. The caveat is cost: PPLI minimum premiums are typically substantial (often $2–5 million or more), and the structure requires compliance with IRC §§ 7702 and 7702A (investor control rules and modified endowment contract rules), which set limits on the policy’s investment flexibility and the premium-to-benefit ratio.

THE US PPLI INVESTOR CONTROL PROBLEM

The US PPLI structure faces a specific compliance requirement that does not exist in the same form in non-US jurisdictions: the investor control doctrine. Under IRS guidance, the policyholder of a PPLI structure must not have “investor control” over the underlying investment assets — i.e., the policyholder cannot direct specific investment decisions in the same way they would if they held the assets directly in their own name.

If the investor control doctrine is engaged, the IRS may treat the policy’s investment income and gains as taxable directly to the policyholder — eliminating the tax deferral benefit and potentially triggering a recharacterisation of past-year returns. US PPLI structures are designed to comply with the investor control rules through limitations on policyholder discretion, use of separate accounts managed by the insurer or independent investment managers, and prohibition on the policyholder directing specific trades.

This compliance layer is specific to US persons and applies regardless of whether the PPLI carrier is US-domiciled or offshore. Puerto Rico — as a US territory with a dedicated PPLI regulatory framework under Act 60 and the Office of the Commissioner of Insurance — is one carrier option that navigates this compliance context; it is covered in our Puerto Rico and Caribbean PPLI analysis.

FATCA AND THE CROSS-BORDER PPLI CONTEXT

US persons holding PPLI with offshore carriers are subject to FATCA reporting obligations. Offshore life insurance policies with a cash value are reportable on Form 8938 (FATCA) and potentially on FBAR (FinCEN 114) if the policy has a value exceeding the applicable thresholds. The offshore carrier must also comply with FATCA — most major PPLI jurisdictions have intergovernmental agreements (IGAs) in place with the United States to facilitate this compliance. Failure to comply with FATCA and FBAR requirements can result in substantial penalties.

SOURCES AND FURTHER READING

• KPMG, Estate Planning in 2025: kpmg.com
• KPMG, Life Insurance: A Powerful Tax Planning Opportunity (Family Office Insights, 2024): kpmg.com
• PwC, Worldwide Tax Summaries — United States: taxsummaries.pwc.com
• EY, Worldwide Estate and Inheritance Tax Guide 2024 — US chapter: ey.com
• Internal Revenue Code §§ 2042, 2035, 7702, 7702A — available at irs.gov
• PPLI.Solutions, Puerto Rico & Caribbean PPLI analysis