If you’re an experienced physician with a substantial net worth, you might want to look down the road and ask yourself: “How much will I be worth in 10 or 20 years? And what will be the ultimate value of my estate?”

For many physicians, the acuity of this vision is becoming more critical these days, as Congress is expected to reduce limits on how much can be passed on to heirs free of federal estate tax.

Another cause for concern: Congress may soon increase federal income and capital gains tax rates on the wealthy.

The good news is that there’s a tool to lessen this tax exposure and also assure a quick infusion of cash for your heirs to pay any tax on inheritance, due a short nine months after your death. This cash can help them avoid a fire sale on illiquid assets, such as real estate or equity in your medical practice, by giving them time to get a good price.

This tool is whole life insurance. The use of these policies can go way beyond simply providing insurance proceeds for your heirs: They can help you build a larger legacy, protect it from taxation and provide cash during your lifetime.

Currently, estates totaling $11.7 million for individuals and twice that amount for married couples have no federal estate tax liability. But every dollar above that limit is taxable. These limits, known as the unified gift and estate tax exclusion, are the total amount you can give away during your lifetime and leave to your heirs without incurring tax.

President Joe Biden has advocated reducing the estate tax exclusion to $3.5 million/$7 million and the gift tax exclusion to $1 million. Even if the eventual limit approved by Congress is much higher, there’s still cause for concern for those with estates well below this limit because the growth of assets in years to come could push them over the line.

Not owning it

Unbeknownst to many wealthy individuals, the cash value and death benefit of their life insurance policies are ultimately factored into the value of their estates. But if someone else owns the policy on which you’re the insured, that’s a different story.

You can arrange ownership of a whole life policy on yourself by a beneficiary, such as one of your adult children. This way, the policy’s growing cash value and death benefit proceeds don’t increase the value of your estate one wit.

Of course, the adult child holding the policy must pay the premiums, and you can give them money every year to do so—up to $15,000 from you or $30,000 from you and your spouse together, in what’s known as a present-interest gift. This means there’s no gift tax due on this money, nor does it count toward your lifetime gift/estate tax exclusion. What’s more, this premium money is removed from your estate. (You can give this same amount tax-free annually to each of your children and anyone else.)

Of course, having an adult child hold the policy requires a good relationship and a certain amount of responsibility on his or her part.

If this isn’t your situation—if you’re concerned your adult child might not pay the premium promptly and let the policy lapse–consider another way to keep the policy out of your estate: creating an irrevocable life insurance trust (ILIT) to hold it. You (the grantor) would appoint a trustee to manage the trust while you’re still living and distribute the policy’s proceeds after your death.

Policies held by ILITs don’t have to be a created for this purpose, as tax rules allow the transfer of existing whole life policies into these trusts. However, there’s a three-year look-back period during which the policy would be part of your estate for tax purposes and count toward your exclusion amount.

As one goal of an ILIT is to let the policy accumulate as much value as possible, a popular option for many married couples is to use a second-to-die life policy. These policies provide a death benefit for the surviving beneficiaries (usually the adult children) after both spouses die. This can be a particularly good option if one spouse is in poor health, posing an obstacle to qualifying for life insurance, and the other is in good health.

Just say “no”

The policy premium can be paid with money that you’ve initially offered a beneficiary—typically, an adult child– as a gift in what’s known as a Crummey letter. This letter notifies the child that the money is available to them and accessible from a particular account. But before you write this letter, secure your child’s pledge to formally turn down the gift and promptly notify you of this decision in a return letter. Then arrange for the ILIT’s trustee use this money to pay the policy premium. The offer and rejection of the gift makes the gift tax-free and takes the money out of your estate. This arrangement requires responsibility on the adult child’s part, but not as much as if he or she were the policy’s owner.

There’s no tax on the growth of the policy’s cash value because you don’t own it. Rather, the trust does. When properly structured, ILITs can enable grantors to borrow against this cash through loans arranged by the trustee.

Such loans are typically made at market interest rates, far below the capital gains rates (which Congress may soon increase) that you’d pay on investment gains and the ordinary income rates (which also may soon rise) on dividends. Thus, the tax advantages of borrowing against an ILIT-held policy as an alternative to selling assets likely will soon become even greater.

This access to low-interest loans is a key advantage of using an ILIT rather than having an adult child own the policy. In the latter scenario, only the adult child can borrow against the policy.

These trusts are expensive to set up and maintain, primarily because of legal fees. Yet the larger your estate and the larger the policy, the more this may be worth this expense.

Rule changes

Using life insurance to reduce tax exposure is a time-honored estate planning technique, but recent changes in the tax code by Congress make it an even better tool. One result of these changes, says Scott Witt of Witt Actuarial Services, is that for a given amount of premium, life insurance policies don’t have to include as much death benefit, proportionately, as they did previously. “They’re now more efficient for accumulation-oriented designs,” Witt says. And to the extent that this value isn’t tapped through loans, this accumulation could mean a greater legacy for your heirs, particularly if you live to a ripe old age.

Though your net worth may currently be nowhere near the new exclusion limit that Congress approves this time around, or new limits set in years to come, asset growth over the next decade or two could push your estate over the threshold.

So it’s a good idea to plan now, with the help of a qualified estate planner and, preferably, a skilled wealth manager. Otherwise, you and your heirs could end up paying a lot more in taxes.