Were You Advised to Use an ILIT to Fund an IUL Policy? It May Have Been a Setup for Disaster.
Many high-net-worth families, professionals, and business owners were advised to use an Irrevocable Life Insurance Trust (ILIT) to purchase a large Indexed Universal Life (IUL) policy. While ILITs can be legitimate estate planning tools, they have increasingly been misused to push complex, high-commission insurance products under the promise of tax efficiency, asset protection, or “free insurance.”
If your IUL was sold in conjunction with an ILIT, and the policy is now underperforming, lapsing, or facing unexpected costs, RP Legal LLC can help. We represent clients nationwide in litigation involving IUL policies sold through ILIT structures, including those with premium financing, multi-tiered funding arrangements, and misrepresented tax implications.
Why IULs Are Sold Through ILITs
ILITs are trusts set up to own life insurance policies outside of your taxable estate. In theory, this allows the death benefit to pass to your heirs tax-free. However, advisors and agents have abused this structure to sell oversized IUL policies by claiming:
- You will pay no taxes on policy proceeds
- You can borrow tax-free against the policy to create income
- The trust will protect the policy from creditors or estate taxes
- You only need to fund the ILIT for a few years
- The policy will pay for itself through gains or policy loans
In reality, the IUL policy within the ILIT is often riddled with steep costs, unrealistic assumptions, and exposure to lapse if not properly managed. These policies often collapse when:
- The trust cannot continue funding the rising premiums
- Policy loans spiral beyond the cash value
- Investment returns underperform the illustrations
- The insured lives longer than expected and ongoing funding becomes unsustainable
The Hidden Risks of IULs in ILITs
Using an ILIT to purchase an IUL introduces multiple layers of complexity and risk. Here are some of the red flags we commonly see:
- Misrepresented policy illustrations with non-guaranteed returns
- Failure to disclose the true cost of insurance and administrative charges
- Premiums that rise significantly over time with no clear plan to fund them
- Trustees or family members pressured to sign documents without understanding them
- Promises that the policy would be “fully funded” in just a few years
- Use of policy loans to make trust distributions that destabilize the IUL
If you relied on this strategy and are now facing a lapsed policy, tax liability, or complete loss of death benefit, you are not alone. These cases are on the rise and often involve large insurance companies, broker-dealers, and marketing organizations that pushed volume-based sales incentives over client needs.
The Illusion of a “Private Wealth Strategy”
One of the most deceptive practices we uncover is the way these transactions are pitched as exclusive “wealth strategies” used only by the ultra-rich. The agent will often suggest the ILIT-IUL structure is part of a high-net-worth planning playbook, implying insider access to sophisticated planning. In truth, what they are really doing is layering a basic insurance product into a poorly designed trust in order to justify excessive premiums and commissions.
Often, the agent recommends an attorney, one they routinely work with, who drafts the ILIT without independent oversight. In some cases, the ILIT does not even allow the very feature the IUL was sold for: policy loans. Clients are shocked to learn that the trustee has no authority to borrow from the policy, defeating the entire purpose of the so-called “tax-free retirement” pitch. This kind of structural failure is not only deceptive, it can be legally actionable.
When the trust is drafted with language that conflicts with how the policy is meant to function, the result can be permanent tax exposure, policy collapse, and a complete loss of retirement planning flexibility. These mistakes are not innocent, they are part of a sales tactic that relies on control over both the insurance and the legal components of the transaction.
RP Legal LLC Has Deep Experience in ILIT and IUL Litigation
Our firm has reviewed and litigated dozens of cases involving:
- ILITs funded with premium financed IULs
- Wealth planning firms selling oversized IULs under estate tax planning strategies
- Sales agents who failed to explain the terms and mechanics of the trust or policy
- Marketing organizations that trained agents to misrepresent the safety and performance of these plans
We work with estate counsel, tax professionals, and financial experts to fully unwind the deal, identify misrepresentations, and hold the responsible parties accountable. These cases are highly technical and require a team with deep insurance litigation experience.
Who Is Most at Risk?
You may have been harmed by an ILIT-funded IUL strategy if:
- You were told your heirs would receive a large death benefit tax-free
- You were shown a “no out-of-pocket” or “self-paying” insurance plan
- Your policy is now lapsing, or your trustee cannot make the premium payments
- You were promised income from policy loans that never materialized
- You are facing surprise tax exposure after the trust structure failed
Many of these transactions involve family trusts, closely held businesses, or legacy planning. Unfortunately, they also involve opaque documents, conflicted advice, and insurance sales disguised as estate planning.
Start With a Review of Your ILIT and IUL Structure
Each evaluation starts with a detailed review of your policy and trust structure. RP Legal LLC will analyze the policy illustrations, trust documents, loan arrangements, and sales materials to determine whether you were misled or if the product was unsuitable. If we identify violations or misconduct, we will explain your legal options and take action to recover your losses.
Call (803) 805-7546 or use our secure contact form to schedule your consultation today.
Let the nation’s most experienced IUL litigation firm help protect your legacy and hold the responsible parties accountable.