irrevocable life insurance trusts chapter 30 tools & techniques of life insurance planning 30 -...
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Irrevocable Life Insurance Trusts Chapter 30Tools & Techniques of Life
Insurance Planning
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Why a gift of life insurance? Life insurance proceeds can be removed from a client’s estate at a relatively low
cost
A gift of other assets may results in a loss of a stepped up basis to the client’s heirs A gift of life insurance does not result in such a loss in income tax savings
Psychologically, life insurance is an easier gift to part with Not income producing
Thought of as a post death security vehicle for others
Advantages of ownership of life insurance by a 3rd party Third party other than the insured’s estate owns, pays for, and is the beneficiary of
the life insurance policy
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Advantages of ownership of life insurance by a 3rd party (cont’d) Next best alternative
Transfer existing policy by gift to insured’s spouse, or other trusted person
Transfer policy to an irrevocable life insurance trust (ILIT) Lowers the overall tax burden
Provides means of creating estate liquidity
Liquidity for the estate without causing inclusion of the proceeds in the insured’s estate
If policy is owned or transferred to the insured’s children No estate tax is imposed until the next generation (to the extent the children have not
used the money)
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Disadvantages of ownership of life insurance by a 3rd party To avoid federal estate tax the client must give up direct control of the policy
The transfer must be complete and permanent
An absolute assignment or total change of ownership must be made if a presently existing policy is to be removed from the client’s estate
Unpredictable events can drastically change the way or the parties the client would prefer to own coverage on his life
Unstable marriage Insured may not get along with the children Spouse could pre-decease the insured Tax laws could change Business reverses or opportunities may suggest a need for the insurance cash values
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Why make a gift to an irrevocable life insurance trust? Federal estate tax can be avoided at the client’s death and spouse’s death
State death taxes can be saved in the same manner as federal estate taxes
Little to no gift taxes are required to create and shelter life insurance from transfer taxes
No probate expenses, delays, or uncertainties with respect to the transfer of assets in an irrevocable life insurance trust
Trustee can use trust assets to provide estate liquidity, prevent a forced sale of a family business, valuable real estate, or a securities portfolio, and keep treasured property in the family
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Why make a gift to an irrevocable life insurance trust? (cont‘d) Significant income and capital can be provided for the surviving spouse
Without causing inclusion in the surviving spouse’s estate
The irrevocability of the trust generally translates into protection from the claims of creditors
Irrevocable trusts generally provide protection from a surviving spouse’s rights of dower, courtesy, or right of election under state law
A gift of a policy to a ILIT gives the insured more control over the ultimate distribution of the policy and its proceeds, than would an outright policy gift
Sprinkle and spray powers for the trustee are highly advantageous
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Why make a gift to an irrevocable life insurance trust? (cont’d) GSTT problems can be reduced or eliminated by judicious use of the GSTT annual
exclusion and GSTT exemption
Using the ILIT as a vehicle to provide wealth replacement for the heirs
Insure the estate tax savings for clients who establish GRITs, GRATs, GRUTs, or charitable lead trusts in the event they die before the trust term ends
Achievement of adequate financial security for those of modest means through the leverage of life insurance
General professional management, protection from creditors, postponement of receipt of inheritance, and avoidance of guardianship of minors
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Disadvantages to ownership of life insurance by an irrevocable trust Client must give up
Income produced by the trust
Use and enjoyment of the property
The right to name, add, subtract, or change the size or terms of a beneficiary’s interest
The right to regain assets placed into the trust
The ability to alter, amend, revoke, or terminate the trust
Considerations Client can discontinue premiums or let the policy lapse and start over with a new trust
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Disadvantages to ownership of life insurance by an irrevocable trust (cont’d) Considerations (cont’d)
Trust language could be drafted to give the trustee the authority to make distributions to the beneficiaries prior to the client’s death
Client could purchase the policies back from the trust for their fair market value
Special power of appointment given to the insured’s spouse, an adult child, or someone the insured implicitly trusts
Power to appoint trust property to anyone other than the insured-grantor, his estate, or creditors of his estate
Name grantor’s spouse as original holder of the power but provide the power would pass to a contingent holder:
If spouse dies first If spouse is no longer married to the grantor If the spouse no longer has the legal or mental capacity to exercise the power
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Disadvantages to ownership of life insurance by an irrevocable trust (cont’d) Considerations (cont’d)
Have a provision that would permit the trustee to collapse the trust and distribute it’s assets to the beneficiaries
Trustee could be given a power to sprinkle or spray income and principal among a class of persons
Trust could provide that if the grantor dies within three years of transferring the life insurance policy to the trust, the proceeds would be paid to the insured-grantor’s executor
Proceeds could then be channeled to the spouse and qualify for the marital deduction
Noninsured spouse could create a split dollar agreement with the trust in which the spouse retains access to the policy cash values
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Disadvantages to ownership of life insurance by an irrevocable trust (cont’d) Up front and continuing cash costs
May be termination fee if the trust is terminated before the life insurance policies have matured
Potential loss of the donor’s contributions out the back door of the trust Crummey powers
Where the annual exclusions cannot shield the annual premium outlays, use of the unified credit and then payment of gift tax
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Irrevocable Trusts – What it is and how it works Two ways an irrevocable trust becomes a life insurance trust
Absolute assignment of policies to the trust
Trust created and cash contributions made to the trust Trust purchases life insurance on the grantor
ILIT may be funded or unfunded Funded – assets other then the life insurance have been placed in the trust
Trust agreement should specify (a) what should happen if trust funds are insufficient to pay the insurance premiums and (b) what should happen if there is an excess of income
Unfunded – trust contains only life insurance policies
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Irrevocable Trusts – What it is and how it works (cont’d) Tax objectives of trust
Make maximum amount of income and capital available to surviving spouse
Avoid inclusion of the proceeds in both spouses’ estates
To accomplish these tax objectives, the draftsperson of the trust inserts certain provisions that
Allow trustee to sprinkle income or spray capital to spouse and children; and/or
Give spouse “all of the income for life and as much principal as necessary for her health, education, maintenance, and support”; and
State “when she dies, my surviving spouse can appoint the remainder of the trust assets among our then living children”
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Irrevocable Trusts – What it is and how it works (cont’d) Caution – if the provisions of the trust required the trustee to pay to the insured’s
estate any cash needed to pay debts, expenses, and taxes This provision would result in federal estate tax inclusion of all amounts that could be so
expended
Solution – trust provision authorizing, but not directing, trustee to Lend money to estate at an appropriate interest rate
Purchase assets from the estate at their fair market value
Estate should realize little to no gain on the sale because appreciated assets receive a stepped up basis at death
Trustee takes that asset with a basis that is stepped up to its purchase value
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Mechanics Attorney drafts and client signs the irrevocable trust document
Trustee then applies for the policy on the insured’s life
Alternatives Plan A
Client applies for the policy as policyowner Client transfers ownership of the policy to the trust by an absolute assignment In a “nonprepaid” case, an informal application is submitted, and once the policy’s
issues status is known, the trust is established, and then the trust formally applies for the policy
Plan B Client applies for term insurance Once the trust is established, trustee applies for a new form of permanent policy and
the term policy can be lapsed
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Mechanics (cont’d) Alternatives (cont’d)
Plan C (the “substitute application”) Applicant, owner, and policy date of a recently issued policy (less than a year old)
are changed to coincide with the effective date of the trust
Client can transfer existing policies to the trust via an absolute assignment Client must survive three years after the transfer in order for the proceeds to be excludable
from his gross estate
Selection of a trustee Grantor-insured as trustee
IRS could argue insured has retained an incident of ownership that causes the insurance proceeds to be includable in his estate
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Selection of a trustee (cont’d) Spouse of the grantor-insured as trustee
If spouse is given a general power of appointment over the policy in the trust, the proceeds will be in the spouse’s estate
Safeguards Name at least one other individual or corporate fiduciary as co-trustee
Specifically exclude the surviving spouse from all potential exercises of incidents of ownership in the policy held by the trust insuring the spouse’s life
Allow distributions to the surviving spouse only if and when the principal of the marital trust is exhausted
Forbid any distributions to individuals that would relieve or discharge the spouse from a legal support obligation
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Selection of a trustee (cont’d) Spouse of the grantor-insured as trustee (cont’d)
Safeguards (cont’d) Limit the surviving spouse to a special power of appointment over trust assets, but
specifically exclude from this power the right to dispose of life insurance on the spouse’s own life
Exclude the surviving spouse as trustee from making any decisions involving the distribution of principal or income to the spouse as a beneficiary except those limited by a health, education, maintenance, and support ascertainable standard
Consider the existence of the trust during two time periods Who should be trustee during the insured’s lifetime?
Who should be the trustee thereafter?
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Reducing or eliminating gift taxes on policy transfers and premium payments through Crummey powers Transferring a policy to a trust is a gift subject to the gift tax
The tax depends on the value of the policy, the availability of the annual exclusion, and the unified credit
If the annual exclusion is available, then up to $12,000 (in 2008) is shielded, and up to $24,000 (in 2008) if the client is married and the spouse consents to the gift
Gift tax valuation rulesPolicy Transferred Gift Tax Value
New policy transferred immediately after issue Cost (net premiums paid)
Existing policy - no further premiums due
Policy in "premium paying" stage
Group term life insurance At the client's option - the actual cost or Table I cost
Policy is about to mature on the date of transfer IRS may value the policy at or near its face amount
In the case of a single premium or paid-up policy, cost of replacement
"Interpolated terminal reserve" plus any unearned premiums paid on the date of death less any policy loans
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Reducing or eliminating gift taxes on policy transfers and premium payments through Crummey powers (cont’d) Minimize the gift tax exposure
Borrow cash value out of policy before making gift
One large policy could be split into several smaller ones and staggered gifts could be made to the trust
The annual exclusion is available only for gifts of “present interest” Donee must receive the immediate, unfettered, and ascertainable right to use, possess, or
enjoy the transferred property
Outright transfers of a life insurance policy qualify for the annual exclusion
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Reducing or eliminating gift taxes on policy transfers and premium payments through Crummey powers (cont’d) Gift of life insurance to a trust
A gift of an insurance policy to a trust will be a gift of a future interest
Absent the annual exclusion, each time a client made a contribution to the trust to enable the trustee to pay premiums, the client would have to use up more of his unified credit to avoid gift taxes
The solution Create a “window" through which the beneficiary could reach to take all or a portion of
that annual contribution This window is called a “Crummey power”
Trust must specify that each trust beneficiary to whom a Crummey power is to be granted is given an absolute but noncumulative right to withdraw a specified amount from the client’s annual contribution
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Reducing or eliminating gift taxes on policy transfers and premium payments through Crummey powers (cont’d) The solution (cont’d)
Crummey power Limit to the lowest of
Amount of the annual exclusion per donor/donee per year The amount actually contributed The greater of $5,000 or 5% of the value of the trusts assets at the time of the
withdrawal
Window must be allowed to remain open long enough to give the beneficiary a meaningful interest in the property given to the trust
trustee should keep sufficient funds in the trust during the open window so that a demand can be realistically and immediately satisfied
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Reducing or eliminating gift taxes on policy transfers and premium payments through Crummey powers (cont’d) The solution (cont’d)
Crummey power (cont'd) Notification should be made by the trustee to all demand powerholders of the right
to make withdrawals In the case of minors, notice should be given to the parent or legal guardian
There is no specific number of days during which a demand power can be exercised that assures that a demand power will create a present interest
30 days from the date of notice seems to be the shortest reasonable period
If the window were opened too high (i.e., the “5 or 5 power” limit was not included) The value of any unexercised demand existing at the beneficiary’s death would
be included in his estate
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Reducing or eliminating gift taxes on policy transfers and premium payments through Crummey powers (cont’d) The solution (cont’d)
The “5 and 5 Power” Allowing a general power to lapse or expire is treated for gift and estate tax purposes
as a release (as if the powerholder made an actual transfer of the property)
The de minimis rule The gift/estate tax problems of the powerholder who doesn’t exercise the
power is avoided to the extent the lapse of the power does not exceed the greater of $5,000 or 5% of the value of the trust assets at the time of the lapse
When a trust is unfunded Only two sources from which the demand right can be satisfied
The cash contribution made by the grantor to the trustee in order to pay premiums The life insurance policy itself
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Reducing or eliminating gift taxes on policy transfers and premium payments through Crummey powers (cont’d) When a trust is unfunded (cont’d)
Conservative planners may protect the insured-grantors gift tax exclusion even further by funding the trust with other assets other than the life insurance policy
Recommended course of action is for the insured-grantor to make cash contributions to the trustee that the trustee could hold for the duration of the demand period
At expiration, the trustee could pay premiums with this contribution
Giving the spouse a Crummey power Client may be worried that children or other donees will exercise their demand
power and thus defeat the purpose of the trust by depriving the trustee of the funds from which to pay premiums
The client may want to increase the number of annual exclusions
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Reducing or eliminating gift taxes on policy transfers and premium payments through Crummey powers (cont’d) When a trust is unfunded (cont’d)
Giving the spouse a Crummey power (cont’d) Limit power to annual amount not exceeding $5,000 or 5% of the trust fund
Higher powers would invite IRS inclusion of the policy proceeds in the spouse’s estate
If the grantor’s spouse has a requisite beneficial interest in the trust, the IRS could argue that the lapse of the spouse’s demand power is equivalent to the release of a general power of appointment
IRC 2041(a)(2) – decedent’s gross estate includes the value of property subject to a general power of appointment that was released or exercised before the decedent’s death , if the result of the release or exercise is the creation of a retained interest described in IRC Sections 2035, 2036, 2037, or 2038
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Gift, estate, and income tax problems related to Crummey powers Where premium outlays will exceed the greater of $5,000 a year or 5% of trust
assets in the year of the grantor’s contribution Client opens the window too much
By allowing the general power to lapse, the beneficiary who could have taken the cash but didn’t, is making a taxable gift to anyone who has interests in the trust that are enlarged by the lapse
The gifts are gifts of a future interest and are ineligible for the gift tax annual exclusion
The Crummey beneficiary who permitted the withdrawal to lapse would be required to file a gift tax return and may have to use part of his unified credit or pay a gift tax
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Gift, estate, and income tax problems related to Crummey powers (cont’d) Policies with large premiums – minimizing the problem
Use a limited pay type policy Example – A ten pay policy would be complete in ten years. Amount saved in estate
taxes would be considerable compared to the relatively small gift taxes paid during the ten year period
Use vanishing premium type arrangement
Increase the number of legitimate powerholders
Add testamentary control Can exercise power of appointment by will only Prevents taxable gift when Crummey power lapses Two ways – general or special power of appointment
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Gift, estate, and income tax problems related to Crummey powers (cont’d) General testamentary power technique
Each beneficiary given a general testamentary power of appointment over his share of the trust
Each beneficiary can choose who will receive that share of the trust if the beneficiary doesn’t live to get it
That right can be exercised only at death and only by a specific provision in the beneficiary’s will referring to the general power in the trust
The trust provides that if the beneficiary doesn’t properly exercise the power, then the property will pass to the other beneficiaries in the trust
Downsides Property subject to this power will be in powerholder’s estate
Equates to a loss of control by the client-grantor
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Gift, estate, and income tax problems related to Crummey powers (cont’d) Special testamentary power of appointment technique
Grant each beneficiary only a limited power of appointment
If the beneficiary dies, his share will pass to whomever he provides by will within a client-specified class, such as the powerholder’s siblings
The powerholder’s choices are limited by the client-grantor
Downsides Property subject to the power will be in the powerholder’s estate if the powerholder
does before the trust ends
Powerholder’s controlled ability to shift property rights equates to a loss of control by the client-grantor
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Gift, estate, and income tax problems related to Crummey powers (cont’d) Use a hanging power
The powerholder is allowed to make a withdrawal each year equal to his share of the client’s contribution, up to the maximum annual exclusion
The right to that aliquot share is cumulative To the extent no withdrawal is made in a given year, the balance hangs over and can
be used in a following year
Example - Client contributes $10,000 to trust with one powerholder Right to first $5,000 lapses, the right to withdraw the remaining $5,000 would
continue By the second year $10,000 worth of contributions would have lapsed, but
$10,000 worth of excess contributions are now available as credits against future years
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Gift, estate, and income tax problems related to Crummey powers (cont’d) Use a hanging power (cont’d)
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Gift, estate and income tax problems related to Crummey powers (cont’d) Use a hanging power (cont’d)
If the beneficiary dies while amounts remain available at the beneficiary’s demand, whatever is subject to that demand is included in the powerholder’s estate
Beneficiaries could frustrate the client’s intent by making withdrawals of large amounts Client’s should carefully select powerholders who are mature enough to understand
the client’s objectives and the potential consequences of their actions
IRS has disallowed a hanging power written as a tax savings clause as adverse to public policy
The single beneficiary trust Providing separate trusts or separate trust shares
If client is willing to give up flexibility
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Gift, estate, and income tax problems related to Crummey powers (cont’d) The single beneficiary trust (cont’d)
Disadvantages Trustee cannot make discretionary trust distributions to persons other than the
beneficiary, since there is only one beneficiary
All income and principal must be payable to the estate of the beneficiary if the beneficiary dies before the trust pays out all its principal
Each beneficiary must be given a testamentary general power of appointment over his trust share
Trust assets cannot be sprinkled or sprayed to the person who needs it or deserves it most
Property will pass as if owned by the beneficiary, possibly to a person objectionable to the client
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Gift, estate, and income tax problems related to Crummey powers (cont’d) The single beneficiary trust (cont’d)
Disadvantages (cont’d) Property will be includable in the beneficiary’s estate
The property may be distributed (due to the untimely death of the beneficiary) prior to the date expected by the client
Grant withdrawal rights to secondary/contingent beneficiaries The “Cristofani Case”
Contingent beneficiaries given withdrawal rights and were entitled to principal only to the extent the prior beneficiaries had not exhausted the trust
IRS argued that this level of powerholders had such a remote chance of actually receiving assets from the trust that there must have been some implied understanding between them and the client-grantor that they would not make such a withdrawal
The tax court disagreed – powerholders had absolute legal right of withdrawal
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Reducing or eliminating gift taxes on premium payments through methods other than Crummey powers Split Gifts
Having the nondonor spouse agree to be treated if he had made one-half of the gifts made by the donor spouse
Election for split gifts is made on the gift tax return for the year in which the gift is made
Permanent withdrawal rights The powerholders’ rights do not lapse and therefore grow each year
Larger premiums can be paid and sheltered by the annual gift tax exclusion
Downside As the value of the property that can be taken grows, so does the beneficiary’s
temptation to make a withdrawal.
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Reducing or eliminating gift taxes on premium payments through methods other than Crummey powers (cont’d) All out maximum transfers
Example Client transfers $200,000 (doubled to $400,000 with gift splitting) in 2008 Excess over $24,000 will not qualify for the annual exclusion, so client must use his
unified credit to avoid a current gift tax liability Once at least $200,000 of assets are in the trust, the greater of $5,000 or 5% is
$10,000 So, from this point forward, the client can make gift tax free gifts of the maximum
exclusion amount Even if the beneficiary doesn’t exercise his withdrawal rights, no taxable gift occurs
because the entire contribution is shielded by the de minimis greater of $5,000 or 5% trust principal rule
Downside Client must be willing to use all or a large portion of his unified credit
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What the attorney should consider in drafting The right of the Crummey power beneficiaries to make withdrawals extends to
contributions to the trust from all sources
The amount subject to the Crummey power should be limited to the smallest amount that will protect the client’s annual contributions
Require the trustee to give return receipt requested notice of any additions to principal and keep the right of withdrawal open for at least 30 days
Require the beneficiary exercise the withdrawal right well within the policy’s grace period for payment
Require that the beneficiary exercise withdrawal rights in writing
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What the attorney should consider in drafting (cont’d) Allow any power given to a minor beneficiary to be exercised on his behalf by a
guardian
Terminate the power of withdrawal upon the insured’s death
Name backup powerholders so that, if a primary Crummey powerholder dies, the annual exclusion is not lost
Have the grantor irrevocably renounce all rights in any policies or other assets in the trust
Be sure the noninsured spouse pays no premiums and contributes no premiums, policies, or other assets to the trust
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What the attorney should consider in drafting (cont’d) The trustee should be given a duty to collect proceeds and indemnification for costs
involved in a suit if required
Give the trustee the right to take one or more policy death benefits under the settlement options provided by the insurer
In community property states, the grantor should indicate that any insurance contributed to the trust was the separate property of the grantor
Do not require that the trustee purchase life insurance or apply contributions to the trust to be used to buy life insurance or pay life insurance premiums
Trustee must act independently in the purchase of the insurance and not as the client’s agent or at the client’s direction
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What the attorney should consider in drafting (cont’d) Do not allow the client to sign the policy application as applicant or owner
Do not allow the trustee to merely endorse the client’s contribution to the trust each year and send them on to the insurance company
How to avoid the transfer within three years of death rule Be sure the client never owns the policy
Suggest to the independent trustee the advantages of owning a policy on the life of the “to be insured,” but let that party make the decision and take all the action to put the policy into effect
Authorize, but do not require, the purchase of life insurance
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How to avoid the transfer within three years of death rule (cont’d) Expand the authority of the trustee to purchase life insurance on the life of anyone
on whom the trust beneficiaries have an insurable interest
Specifically deny the insured the power to acquire any rights in a policy currently owned by the trust
Permit, but do not require, that the trustee pay premiums
A client’s gift of existing life insurance must be made with no strings attached
Be sure that facts indicate that the trustee is not acting mechanically as the agent of the client
If possible, during the first three years, have the trustee pay premiums from a source other than the insured.
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How to avoid the transfer within three years of death rule (cont’d) Be sure that the trustee physically obtains and retains possession of all polices
assigned to the trust
Authorize the trust to enter into a special arrangement with the client’s corporation or other business enterprise or a third party for splitting premium dollars and policy ownership
Avoiding transfer for value rules with a trust The transfer was to the insured, if the trust was defective
If the irrevocable trust was a partner of the insured, the transfer falls within one of the exceptions
Section 1035 exchanges should not cause a new three year period to commence for estate tax purposes under Section 2035
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Structuring the trust for “what ifs” Escape or failsafe contingency provision
Requires the trustee to hold any insurance proceeds that are included in the grantor’s estate, and to pay them out in a manner that qualifies the proceeds for the estate tax marital deduction
As a general power of appointment or as a QTIP deduction
Clause could obtain the marital deduction by providing for Outright payment of the insurance proceeds to the surviving spouse
Income interest to the surviving spouse coupled with a general power of appointment
Payment of the proceeds to a trust the surviving spouse can revoke at will
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Allocation of the federal estate tax The IRC allows the insured to specify, by an allocation clause in his will, who will
bear the burden of any estate tax
Income tax implications Grantor trusts
Income taxed to the grantor and any deductions, gains, losses, or credits realized by the trust can be used by the grantor
What will cause the trust to be considered a grantor trust? Retention by the client or the client’s spouse of a reversionary interest in the income or
principal in the trust Only if the actuarial value of the retained reversionary income is greater than 5% of
the value of the income or principal that may revert
Retention of the power to control the beneficial enjoyment of the income or principal of the trust
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Income tax implications (cont’d) What will cause the trust to be considered a grantor trust? (cont’d)
Retention of certain administrative powers Power to purchase, deal with, or dispose of the income or principal of the trust for
less than adequate and full consideration
Power to borrow income or principal without adequate interest or security
Related or subordinate trustee lends income or principal without adequate collateral or reasonable rate of interest
If someone other than the trustee can vote corporate stock held by the trust, or has the power to control the investment of stock or securities held by the trust, or has the power to reacquire the principal of the trust by substituting property of equal value
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Income tax implications (cont’d) What will cause the trust to be considered a grantor trust? (cont’d)
Retention of the power to revoke the trust by the client or a nonadverse party
If trust income is, or in the discretion of the client or a nonadverse party, may be
Distributed to the client or his spouse
Held or accumulated for future distribution to the client or his spouse
Used to pay premiums on a policy on the life of the client or his spouse
Used to discharge a legal obligation of the client or his spouse
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How to handle last-to-die insurance in an irrevocable trust Reasons to use these policies
Payment of proceeds often tracks with the estate’s need for cash
Lower outlay than if the same amount of coverage were obtained by the older insured
Guidelines Do not name either spouse as a life beneficiary of the trust
Do not name either spouse as trustee
IRC 2035 Only if (a) both spouses die with the three year period following the transfer, and
(b) the transferor spouse is the second to die
The life insurance proceeds will be includable under the three year rule
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How to handle last-to-die insurance in an irrevocable trust (cont’d) Guidelines (cont’d)
Situations where last-to-die policies are not indicated Where client wants to pass significant wealth to someone other than the surviving
spouse
Where there is no surviving spouse
Where the surviving spouse is not a U.S. citizen and a QDOT is contra indicated
Where the funds needed to maintain the surviving spouse’s standard of living will require significant capital
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How to handle group term life in an irrevocable trust Group term life is an ideal transfer where
It makes a significant estate tax savings possible at a minimal gift tax cost
Considerable psychological advantage Employee feels cost is low since “little of current value” is given up
Special problems Assignability
Obtaining the annual exclusion
Community property issues
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Community property issues Community property states
Alaska, Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, and Washington. Wisconsin is a quasi-community property state
Life insurance Acquired by one or both spouses during the marriage while domiciled in a
community property state is typically considered community property Each spouse is the owner of one-half of the policy
Adverse consequences Noninsured spouse’s interest in the community property may be includable in her
estate
A noninsured nongrantor has made a gift of her interest if community property was used to pay premiums on the policy
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Community property issues (cont’d) Life insurance (cont’d)
To avoid inclusion in estate, do not Give either spouse a life income in the trust
Convert the insurance, prior to the transfer to the trust, to separate property of the insured