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Christopher E. Erblich, chair, Tax & Estate Planning Practice Group and William A. Drennan, membe

Many wealthy clients and owners of closely held businesses need to acquire a substantial amount of life insurance to provide liquidity to pay for their estate taxes. Life insurance provides substantial cash shortly after death, which is needed to pay the estate tax. These clients may establish an irrevocable life insurance trust (ILIT) to be the owner and beneficiary of the policy. By using an ILIT as the owner and beneficiary, the client can avoid having incidents of ownership in the policy and therefore avoid estate tax on the death benefit payable under the policy.

A key challenge is determining how the ILIT will pay the premiums without th...