Irrevocable Life Insurance Trusts Chapter 30 Tools & Techniques of Life Insurance Planning 30 - 1 Why a gift of life insurance? Life insurance proceeds

Irrevocable Life Insurance Trusts Chapter 30Tools & Techniques of Life

Insurance Planning

30 - 1

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


Insurance Planning

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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


Insurance Planning

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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”


Insurance Planning

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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?


Insurance Planning

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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


Insurance Planning

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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


Insurance Planning

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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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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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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


Insurance Planning

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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


Insurance Planning

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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


Insurance Planning

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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


Insurance Planning

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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


Insurance Planning

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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


Insurance Planning

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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


Insurance Planning

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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


Insurance Planning

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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.


Insurance Planning

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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


Insurance Planning

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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


Insurance Planning

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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


Insurance Planning

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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


Insurance Planning

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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


Insurance Planning

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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


Insurance Planning

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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

Documents

Irrevocable Life Insurance Trusts Chapter 30 Tools & Techniques of Life Insurance Planning 30 - 1 Why a gift of life insurance? Life insurance proceeds