Many clients rely on life insurance as part of their estate plan. Indeed, for clients with taxable estates, it is difficult to plan without using life insurance to pay estate taxes. Life insurance is particularly important if the assets are illiquid, such as real estate or a closely held business, and the estate tax needs to be paid within nine months of death.
Life insurance can be purchased so that the entire amount of the death benefit is received by the beneficiaries estate tax free. For example, under current law, if a husband and wife have assets worth $7 million exclusive of life insurance, and they have a $3 million life insurance policy in an irrevocable trust, the children receive $10 million estate tax free. This assumes the assets are positioned properly to take advantage of each spouse's $3.5 million exemption and the irrevocable trust is the original owner of the policy.
When creating an irrevocable trust, several complicated issues arise that are the Trustee's responsibility. If the Trustee is a family member unfamiliar with the legalities of irrevocable trusts, professional guidance is necessary. Issues relevant to the Trustee include (1) is a Trust account opened by the Trustee to receive premium payments; (2) assuming the grantor pays the premium, is the payment protected by the annual exclusion; (3) the answer to (2) above often depends on whether "Crummey letters" have been prepared, qualifying the premium payment for the annual exclusion.
The Trustee also is responsible for making sure the policy is performing properly, e.g., are the policy assumptions pertaining to interest and mortality rates appropriate? Also, the Trustee must determine if the insurance carrier is still a strong company.
Using an Irrevocable Trust to own life insurance provides significant advantages. However, the advantages come with some complication; namely, choosing the right Trustee. If the Trustee is not an institution or professional, the Trustee must know where to turn for help in dealing with a myriad of issues.
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