Irrevocable Life Insurance Trust
If a person is the owner of a life insurance policy on his or her life, then upon death, the entire proceeds of the life insurance death benefit are included in that person's taxable estate, and will be subject to estate tax if the value of the person's estate, when combined with the death benefit proceeds of the life insurance policy, is great than the maximum applicable exclusion amount, (Internal Revenue Code ((I.R.C)). §2042).
To avoid the estate tax on life insurance proceeds, an Irrevocable Life Insurance Policy can be established to serve as the third-party independent owner of the policy. The trust is irrevocable and operates under a separate tax identification number. A person other than the insured must serve as Trustee of the trust. Using such an irrevocable trust to own the life insurance, an individual can leave a large amount of insurance to his or her loved ones without any estate or income tax. Any amounts gifted to the insurance trust are subject to the gift tax rules set forth in I.R.C. § 2503(b).
Crummey withdrawal powers and letters signed by the trustee and beneficiaries are used to document that beneficiaries have the present use of any amounts gifted to the trust, and help insure that the full annual gift tax exclusion is available to cover any amounts gifted to the trust. A grantor making exceedingly large gifts to an irrevocable life insurance trust, where the gifts to the trust exceed a multiple of the number of beneficiaries multiplied by the annual gift tax exclusion amount, usually must also file a 709 federal gift tax return to report the amount of unified credit that the grantor is consuming on each large annual gift.
Care must be taken to properly consider and draft such an irrevocable insurance trust because the trust is irrevocable and cannot be amended. Each client must remember that if a beneficiary falls out of favor with the grantor, the beneficiary cannot be simply amended out of the insurance trust, because an insurance trust is irrevocable. When prepared properly, however, an irrevocable trust will remove all of the incidents of ownership from all of the death benefit proceeds within the trust, hence eliminating all of the estate taxes that would otherwise be levied upon those proceeds.
- Areas of Practice
- Revocable Living Trust
- Living Wills
- Durable Power of Attorney
- Irrevocable Life Insurance
- Charitable Remainder Trust
- Tax Planning
- Estate & Gift Tax
- Advanced Estate Planning
- Private Foundation
- Trust Administration
- Probate & Trust Litigation
- Business Succession Planning
- Asset Protection
- Corporation
- Limited Liability Company