Liquidity at Death. Deferral for Decades: Part 2 — One Trust for the Estate-Tax Bill, One for the Compounding

By Matt Levesque, Vérité Planning Solutions

Think of the plan as two trusts sitting next to each other, both funded with completed gifts, both outside the taxable estate, both written so children and a grandchild can be helped without putting the assets back on the parents’ balance sheet.

Bucket one: ILIT and life insurance

The irrevocable life insurance trust buys either a second-to-die policy or an individual policy on one spouse, where the economics are typically more favorable. In the composite we use for this series, the trust is funded with $2 million a year for eight years — $16 million of exemption used for premiums — to support a $30 million initial death benefit that is designed to increase as cash value grows. At a reasonable policy return assumption, the death benefit projects to grow along with the family’s future estate tax exposure on the assets remaining in their taxable estate.

Three things make this bucket useful, and they are the same three things the family in our completed case was trying to buy.

• Tax. Premium gifts leave the estate. Growth inside the policy is not taxed currently. The death benefit is generally received income-tax-free and, if the ILIT is drafted and administered correctly, excluded from the insured’s estate.
• Access while living. The trustee can take policy loans or withdrawals, typically tax-free up to basis if the policy stays in force, and appoint those dollars to beneficiaries under a HEMS standard — health, education, maintenance, and support. That is the mid-term bucket: years ten through thirty, while the parents are still living.
• Liquidity at death. At death, the net death benefit arrives in the trust. The first use is often the remaining estate tax on the taxable estate. What is left stays in trust for the children and, if the document allows, for grandchildren. The family does not have to sell a concentrated position or a home to write the IRS a check.

The design in the composite is an indexed universal life policy with an increasing death benefit. The illustration is not a guarantee and caps, participation rates, policy charges, and loans all move the result. The primary reason this trust exists is so the estate-tax bill has a dedicated payor, and so the children have a tax-advantaged source of funds before anyone dies.

Bucket two: dynasty trust and PPVA

The second trust is the long-term trust. In the composite, the couple gifts $10 million of appreciated property — including transferable interests in early-stage private companies — into an irrevocable non-grantor dynasty trust. The trustee then contributes those assets to a private placement variable annuity. Where the carrier will accept it, the contribution can be in kind, including privately held shares or interests in private companies as well as other non-bankable assets. This is a recognized feature of private placement products, though it is subject to carrier acceptance, independent valuation requirements, and strict compliance rules.

The transfer of appreciated privately held shares (or other property) as premium is treated as a sale or exchange, creating a taxable event. Only appreciation that occurs after the contribution grows tax-deferred inside the PPVA until distribution.

For the family with pre-IPO positions, this means paying tax now on the built-in gain already present, then capturing tax deferral on the potentially larger future appreciation that occurs between contribution and a later liquidity event or distribution.

The PPVA does one job that the bare trust cannot do well. Inside the contract, gains, dividends, and interest that arise after contribution are not currently taxed to the trust. The income-tax exposure described in Part 1 is addressed for as long as the value stays in the annuity. That is why the wrapper sits inside a non-grantor dynasty trust rather than on the couple’s personal return. The estate-tax work is already done by the gift, and the annuity is there to let that gift compound for the lifetime of the annuitant.

Investor control and diversification

Two compliance requirements keep the tax deferral intact.

• Diversification. A single issuer generally cannot dominate the account. Regulations dictate that no one investment can exceed a stated percentage and that the portfolio be rebalanced inside a defined window, and regularly thereafter.
• Investor control. The trust appoints the investment manager. Day-to-day investment decisions are determined by the manager inside the separate account. Arrangements that give the owner the practical ability to direct specific trades or hold personal investments can cause the owner to be treated as the current taxpayer. The surrender of control over the investment decisions creates the separation necessary to facilitate the success of the planning strategy.

Best types of assets for the PPVA

The wrapper is most useful for assets that are expected to generate substantial post-contribution appreciation and that would otherwise create tax drag inside a non-grantor trust:

• High-growth private equity or pre-IPO interests that are transferable and that the carrier will accept in kind.
• Concentrated positions that need to be diversified without an immediate tax on the sale.
• Assets with low current income but high expected capital appreciation.
• Alternative or non-bankable assets that can be contributed in kind and held long term.

Assets that produce high current ordinary income, or that are not expected to appreciate further, generally do less work inside the annuity. The cost of the wrapper and the ordinary-income character of eventual distributions should be weighed against the deferral benefit.

Access from this bucket is different from the policy. The trustee takes a partial surrender from the annuity. That amount is generally ordinary income to the trust. If the trustee distributes the income to the beneficiary in the same year, the trust can often pass the tax out to the beneficiary. If the trustee retains it, the trust pays the tax at compressed rates.

What happens at the next death

This is the part that makes the two-bucket design a multi-generation plan rather than a one-death plan.

• Insurance trust. The ILIT receives the death benefit. After any loan or estate-tax use, the remainder stays in trust for descendants.
• Dynasty trust. The PPVA is still owned by the dynasty trust. The original gift was completed. The contract does not spring back into the taxable estate. A new measuring life, the annuitant (often one of the children) keeps the deferral running. When that measuring life ends, the remaining value is distributed. That is the latest date the deferred income comes back into the system. Until then, the compounding can continue for Generation 2 and for the grandchild already in the family.

In the composite, forty years after the gifts, the remaining taxable estate still owes estate tax — the couple did not give away everything. The illustrated death benefit is designed to more than cover that remaining bill. The illustrated PPVA value is still inside the dynasty trust. Added together, the after-tax estate plus the two trusts is a substantially larger net legacy than the same $50 million left to compound inside the taxable estate with no planning.

How the beneficiaries actually use the money

Both documents in the completed case used a HEMS standard plus milestones the parents cared about: education, first homes, weddings, seed capital for a business, and help already needed for a young grandchild. The insurance cash value is the nearer bucket. The annuity is the later bucket. The trustee — typically a professional company in a no-tax state — decides, against the document the parents signed, not against a phone call from the grantor.

That last point is the trade. Irrevocable means irrevocable. The parents give up direct control in exchange for the estate-tax and deferral results. Families who want the option to unwind the whole plan should not start this file. Families who want the child to be helped, and the grandchildren after that, without a 40 percent haircut on every extra dollar of growth, will recognize the trade immediately.

Part 3 turns this into an advisor process: suitability, the exemption math, the implementation order, and the questions that belong in the first meeting with counsel and the CPA.

Disclosure: Educational content only. Not tax, legal, accounting, investment, or insurance advice, and not a recommendation of any product or strategy. Individual results vary. Consult your own qualified advisors before acting. Vérité Planning Solutions and its professionals may receive compensation in connection with insurance or related products. Views are the authors’ and do not necessarily reflect those of Digital Wealth News.

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Author Bio: Matt Levesque is a founding partner at Verité Planning Solutions, leading the design and execution of advanced insurance strategies for high-net-worth clients.

He specializes in structuring insurance solutions within complex financial plans — from funding buy-sell agreements and protecting key-person value to integrating insurance into trust and estate strategies for generational transfer. Matt works closely with tax, legal, and investment professionals to ensure each strategy is coordinated, thoroughly vetted, and built to perform as intended over time. From initial modeling through ongoing review, he remains actively involved to maintain alignment as circumstances evolve.

His background spans the full financial planning continuum. He began in comprehensive wealth management at Wells Fargo Advisors, moved into product distribution roles at Sun Life and Symetra, and later joined Verité Group, LLC as Director of Premium Finance Case Design — experiences he now applies to ultra-high-net-worth planning.

Matt holds a Master’s in Financial Planning from the McCallum Graduate School of Business at Bentley University, as well as a Bachelor’s degree in Finance.

Based in Alton, New Hampshire, he is known for simplifying complex structures and helping clients make informed, confident decisions. Clients rely on Matt not just for answers, but for the right questions — the ones that uncover hidden risks, refine strategy, and align each decision with a defining financial event.