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Life Insurance Trust


A life insurance trust is the second most often utilized estate planning tool, following the implementation of credit maximizing wills.

It Should Be Considered By:

1. Individuals or couples with a net worth projected to be large enough to exceed the federal or state estate tax exemption or exemption equivalent amount. The federal exemption equivalent amount was doubled to over $11,000,000 per individual for 2018 by the Tax Cuts and Jobs Act leaving many people to believe that they will not be subject to the federal estate tax. However, the exemption is only doubled through 2025 after which it reverts to $5,000,000 adjusted for inflation from 2010.

2. Families where the surviving spouse or heirs may need help in the management of assets.

Situation

The federal estate tax rate is 40% of the amount by which the total fair market value of the estate exceeds the exemption equivalent amount. If you plan to pay the estate taxes using assets within the estate, you actually pay more taxes because the assets used to pay the taxes are subject to the estate tax. The solution becomes part of the problem.

Strategy

Create an irrevocable life insurance trust. The trust will be funded with gifts by the grantor(s). The trustee elects to purchase a life insurance policy on the grantor(s). Annual gifts are made to the trust. These gifts to the trust for the benefit of the trust beneficiaries are designed to qualify for the gift tax annual exclusion. Once the transfer is made to the trust, the trustee will notify the beneficiaries of their right to make withdrawals from the trust (via Crummey Notices). After the withdrawal period has expired, the trustee will use the available funds to pay the premiums. At the death of the grantor(s), the policy proceeds will be paid to the trust income and estate tax free. The funds will be available to provide liquidity to the estate to pay taxes by purchasing assets from the estate or loaning money to the estate. The trust can have a trusted individual act as trustee or may utilize a corporate trustee. The trustee can have the power to make decisions regarding investment of trust assets or elect to hire a manager. The trustee may also be given flexibility in making distributions from the trust.

Advantages

1. The value of the trust will be excluded from the estate for estate tax purposes.

2. Liquidity is available for estate settlement costs.

3. The premiums on life insurance policies can be designed to match the gift tax annual exclusion.

Disadvantages

1. The trust is irrevocable and may not be altered or amended by the grantor(s).


"The success of estate planning is measured by the sleepwell index of the estate owners."