IDGTs, ILITs and PPLI: How Established Families Keep Wealth Together

Families that have kept wealth together for generations rarely rely on a will alone. Behind most long-lived fortunes sits a small set of legal and insurance structures, chosen with attorneys and tax advisors long before they are needed. Many first-generation founders, people who built a business, a property portfolio or a collection in one lifetime, never hear about them, or hear about them too late.

This is a plain-English guide to three of the most widely used: the intentionally defective grantor trust (IDGT), the irrevocable life insurance trust (ILIT) and private placement life insurance (PPLI). It explains what each one does, why families use it, what it costs them in flexibility, and where good records come in.

Before you read on: this describes US federal rules in general terms. The details are technical, they change, and whether any of these structures suits a family depends entirely on its circumstances. None of this is legal, tax or financial advice. These structures are designed and set up by the family's own attorneys, tax advisors and licensed insurance professionals.

The problem these structures solve

Above an exemption amount that Congress has changed several times, an estate can owe federal estate tax at death, and some states add their own. The tax is due in cash, on a deadline, and it is calculated on the value of everything the person owned, including assets that produce little cash: a building, a stake in a private company, a collection.

That combination is what breaks estates apart. Families end up selling the very assets they meant to keep, often quickly and on poor terms, to pay a bill measured against those same assets. The three structures below approach the problem from different directions.

IDGT: move the growth out of the estate

An intentionally defective grantor trust is an irrevocable trust drafted so that two sets of tax rules treat it differently. For estate tax purposes, assets moved into it are no longer part of the grantor's estate. For income tax purposes, the grantor is still treated as the owner, so the grantor keeps paying the income tax on what the trust earns. The "defect" is deliberate.

That has two effects families value. First, future growth on assets in the trust happens outside the estate. Second, every income tax payment the grantor makes on the trust's behalf is, in effect, a further transfer to the beneficiaries that does not count as a gift.

A common way to fund one is a sale to the trust. The grantor typically makes an initial gift to the trust, then sells it further assets in exchange for a promissory note at an interest rate set by the IRS. Because the grantor and the trust are treated as the same taxpayer for income tax, the sale generally does not trigger capital gains tax. If the assets grow faster than the note's interest rate, that excess growth passes to the beneficiaries outside the estate.

The trade-offs. The trust is irrevocable. Assets that leave the estate generally lose the "step-up" in tax basis that assets held until death receive, so heirs may face more capital gains tax if they later sell. The note has to be serviced. And the whole structure rests on the values used for each gift and sale, which the IRS can challenge.

ILIT: cash for the estate, outside the estate

An irrevocable life insurance trust owns a life insurance policy so that the payout is not counted as part of the insured person's estate. When the insured dies, the trust receives the death benefit and can use it to give the estate the cash it needs, for example by buying assets from the estate or lending to it, so taxes and costs can be paid without a forced sale.

Married couples often use a survivorship policy, which pays out on the second death, because that is typically when estate tax falls due. The grantor usually makes gifts to the trust each year to cover the premiums, structured so they can qualify for the annual gift tax exclusion.

The trade-offs. Like an IDGT, it is irrevocable. Premiums must be funded for as long as the policy runs. And timing matters: if an existing policy is transferred into an ILIT and the insured dies within three years, the payout can be pulled back into the estate, which is one reason trusts often buy a new policy directly.

PPLI: investment growth inside a life policy

Private placement life insurance is a form of variable life insurance offered privately to qualified, high-net-worth investors, usually with large minimum premiums. The policy's cash value is invested through dedicated investment funds or accounts. Growth inside the policy is generally not taxed while it stays there, and the death benefit generally passes to beneficiaries free of income tax. Families often hold the policy in a trust, such as an ILIT or an IDGT, so it also sits outside the estate.

The trade-offs. The rules are strict. The policy must qualify as life insurance, the underlying investments must meet diversification requirements, and the policyholder cannot direct specific investments. Costs, minimums and complexity are significant, and the tax treatment depends on the policy being structured and administered correctly over many years.

Why all three depend on the record

Every one of these structures runs on facts about the family's assets. A gift or sale to an IDGT is only as defensible as the value placed on what was transferred. An ILIT is only as useful as the estimate of what the estate will owe, which depends on what the estate is worth. A PPLI policy needs clean records of the assets and interests involved. And all three are long-lived: the trustee who administers them in twenty years needs to find the same facts the family relied on today.

For families whose wealth is in buildings, land, private companies and collections, those facts usually live in scattered appraisals, deeds and files across several firms. That is the part Arrabon addresses:

• Documented values. Independent appraisals, title reports and other expert evidence for each asset, recorded on its ACAN record with each expert's credentials, so the values behind a gift, a sale or an insurance decision can be traced to who produced them.
• Precise interests. Assets held in a legal structure can be represented as fractional interests, so a plan can move a specific share of a building or a collection rather than all or nothing.
• A record that lasts. Transfers, re-appraisals and custody checks stay on the record for as long as the family holds the assets, for the trustees and advisors who come later.

Arrabon does not design, recommend or administer trusts or insurance, and it does not decide what an asset is worth. It keeps the record the family's advisors build on. The Ashdown estate case study shows how this can fit together for one illustrative family.

What it does not fix

• Values can still be challenged. Independent appraisals on a record help a family support its values, but the IRS can still question them, and valuation disputes are common in estate planning.
• The law changes. Exemption amounts, trust rules and insurance taxation have all shifted over time, and plans need regular review.
• Irrevocable means irrevocable. Good records do not make a structure easier to unwind if circumstances change.
• Advice is still required. A record supports a plan. It does not replace the attorneys, tax advisors and insurance professionals who design one.

Where Arrabon fits

Arrabon's Estate & Legacy service gives a family one verified record of everything its estate holds, the tools to divide interests precisely among heirs, and liquidity options that do not require selling an asset whole. Advisors can join the advisor network to bring clients' estates onto the platform.

The structures that keep wealth together across generations are not secret. They are simply easier to use, and to defend, when the facts about what a family owns are written down in one place.