What Blended Families Should Know About Estate Planning
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An estate plan with an Irrevocable Life Insurance Trust may help reduce estate taxes and ensure equitable distribution of a blended family’s assets.

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In blended families, the death of a spouse with children from a previous marriage can create complicated financial and emotional issues among surviving family members—even in families that have a positive dynamic.

In some cases, state inheritance laws and estate planning practices prioritize a surviving spouse above children. This treatment can create problems in blended families, especially when a second spouse is close in age to the children from a first marriage—potentially delaying the children’s expected inheritance. In these situations, children may feel shortchanged, or even disinherited, which can create anxieties that can compound the grief all parties feel for the loss of a loved one.

Using life insurance in an estate plan

A life insurance policy may offer a way to provide family members with protection in the form of death benefit proceeds after the insured dies. When a life insurance policy is included in an estate plan that also features an Irrevocable Life Insurance Trust (ILIT), a blended family can potentially reduce estate taxes while carving out funds for specific beneficiaries to inherit.

An ILIT is a trust that may be established to hold assets, including a life insurance policy, outside of the grantor/insured’s taxable estate. The grantor may make gifts to the trust to pay for premiums on the life insurance policy it holds. Whether the gifts to the ILIT are subject to gift tax depends on the ability to make annual exclusion gifts1 and/or use of the lifetime gift tax exemption amount2, they should not be subject to gift tax. Check with your tax advisor for your particular situation.

While a trustee (typically a close friend, a professional trustee or an extended family member) manages the trust, the insured/grantor names the trust beneficiaries. For example, in a blended family, the insured may choose to designate children from a previous marriage as beneficiaries. Then, when the insured passes away, the trust will receive the policy’s death benefit proceeds and may distribute those funds to the children under the terms of the trust. The surviving spouse may receive other assets as specified in the deceased’s will.

When properly structured, ILITs offer three primary benefits that can make them attractive for blended families seeking to reduce potential estate tax and treat surviving spouses and children fairly:

  1. Assets excluded from the grantor’s personal estate. Because the life insurance policy is held by an irrevocable trust, the death benefit proceeds are distributed to the ILIT free from estate and income tax3, after which they can be distributed to the beneficiaries pursuant to the terms of the ILIT. What’s more, gifts made to the trust during the insured’s lifetime to pay policy premiums also may reduce the size of the taxable estate inherited by the surviving spouse.
  2. May help surviving spouse maintain lifestyle. Using an ILIT funded with life insurance to provide an inheritance for children from a previous marriage preserves other assets to provide for a current spouse’s financial security.
  3. Children receive inheritance before death of current spouse. Death benefit proceeds paid to the ILIT can be distributed to children, as the beneficiaries of the ILIT, within the terms of the trust, avoiding the need to wait for the death of the current spouse to receive whatever remains from the estate’s value.


Life insurance is subject to underwriting and approval of the application and will incur monthly charges.

1 As of January 1, 2024, the annual gift tax exclusion is $18,000 per donee (indexed for inflation).

2 According to the Tax Cuts and Jobs Act of 2017, the federal estate, gift and generation-skipping transfer (GST) tax exemption amounts are all $10,000,000 per person (indexed for inflation effective for tax years after 2011); the maximum estate, gift and GST tax rates are 40%. In 2026, the federal estate, gift and generation-skipping transfer (GST) tax exemption amounts are scheduled to revert to $5,000,000 per person (indexed for inflation for tax years after 2011).

3 For federal income tax purposes, life insurance death benefits generally pay income tax-free to beneficiaries pursuant to IRC Sec. 101(a)(1). In certain situations, however, life insurance death benefits may be partially or wholly taxable. Situations include, but are not limited to: the transfer of a life insurance policy for valuable consideration unless the transfer qualifies for an exception under IRC Sec. 101(a)(2) (i.e., the “transfer-for-value rule”); arrangements that lack an insurable interest based on state law; and an employer-owned policy unless the policy qualifies for an exception under IRC Sec. 101(j).

The results and explanations generated by the calculator on this page may vary due to user input and assumptions. Pacific Life does not guarantee the accuracy of the calculations, results, explanations, nor applicability to your specific situation. We recommend that you use this calculator as a guideline only and ultimately seek the guidance of an experienced professional. CalcXML, the provider of this information and interactive calculator, is an independent third-party and is not affiliated with Pacific Life.

The above is provided for informational purposes only and should not be construed as investment, tax, or legal advice. Information is based on current laws, which are subject to change at any time. You should consult with their accounting or tax professionals for guidance regarding your specific financial situation. 

Pacific Life, its affiliates, their distributors and respective representatives do not provide tax, accounting or legal advice. Any taxpayer should seek advice based on the taxpayer’s particular circumstances from an independent tax advisor or attorney.

Pacific Life refers to Pacific Life Insurance Company and its affiliates, including Pacific Life & Annuity Company. Insurance products can be issued in all states, except New York, by Pacific Life Insurance Company or Pacific Life & Annuity Company. In New York, insurance products are only issued by Pacific Life & Annuity Company. Product/material availability and features may vary by state. Each insurance company is solely responsible for the financial obligations accruing under the products it issues.

The home office for Pacific Life & Annuity Company is located in Phoenix, Arizona. The home office for Pacific Life Insurance Company is located in Omaha, Nebraska.


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