Abstract
For those of you who have (1) a taxable estate (or an estate potentially subject to estate tax) and (2) life insurance, this chapter is a must read. A life insurance trust can literally make hundreds of thousands of dollars of taxes disappear. For you, a life insurance trust is a “have to have” document, as much as a will, a power of attorney, a living will, and a health care proxy.
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Notes
- 1.
If you live in a jurisdiction with a low estate tax threshold, the mere existence of life insurance can create a taxable estate. Think about it. If you have $750,000 of assets and a $500,000 life insurance policy, you may be thinking to yourself that you don’t have a taxable estate if the federal estate tax exemption is $1 million. However, you’re forgetting to add the death benefit of the life insurance, which will put you over the top for estate tax purposes. The life insurance trust takes the death benefit out of the equation.
- 2.
There’s always a caveat. One very important consideration with life insurance is that if you have an existing life insurance policy and you transfer it to a life insurance trust, it doesn’t leave your taxable estate until three years have elapsed. So, if you transfer the policy to a trust, and you die two years later, you get zero estate tax savings. However, if you die three years and one day later, the entire death benefit is excluded from your taxable estate.
- 3.
Some term insurance policies are convertible, which means you can exchange your policy for a permanent policy during the conversion period (at a much higher premium, of course). You pay for the privilege—every bell and whistle added to an insurance policy (even the “luxury” of paying monthly instead of annually) adds to the cost.
- 4.
Just because you can’t change the trust, that doesn’t mean the trust can’t be changed. A well-drafted trust can give your trustee or, in some cases, your beneficiary lots of powers to modify the trust. These include changing who the beneficiaries are, changing when and how the beneficiaries receive assets, changing the trustee, and even rolling the trust assets into a new trust in the event the ILIT isn’t working at some point in the future.
- 5.
Need a refresher in the blueprint of building a trust? Look back at Chapter 8, “Trust in Trusts,” for the building blocks.
- 6.
Crummey notices work with any irrevocable inter-vivos trust; it doesn’t need to be an ILIT. The mechanics are the same in order to have a contribution to a trust qualify for the annual exclusion from gift taxes.
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© 2013 Deirdre R. Wheatley-Liss
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Wheatley-Liss, D.R. (2013). Insurance Trusts. In: Plan Your Own Estate. Apress, Berkeley, CA. https://doi.org/10.1007/978-1-4302-4495-0_10
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DOI: https://doi.org/10.1007/978-1-4302-4495-0_10
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Publisher Name: Apress, Berkeley, CA
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