Life Insurance Trusts

Life insurance trust are an irrevocable life time trust designed to hold life insurance policies on the life of the grantor and/or the grantor’s spouse for the benefit of their heirs.

 

Advantages

If the Trust is designed correctly, the proceeds of the insurance will not be included in the grantor’s or grantor’s spouse’s estates and will pass estate tax free to the beneficiaries.
Depending on state law, the proceeds may be not available to creditor of the estate.
A life insurance Trust can be used to leverage the amount of property passed out to beneficiaries. The gift tax value of the insurance policy is fair market value on the date of the gift. (Fair market value of an insurance policy is the cost of replacing the policy.) The difference between the gift tax value and the face value of the policy is the amount of leverage.
For example, if the value of the life insurance policy on the date of the gift is $10,000. and the face value of the policy is $250,000., the grantor uses $5,500. of his/her unified credit at the time of the gift (based on a 55% federal estate tax bracket) versus using $137,500. of his/her unified credit at time of death. At the same time you reduce the need for life insurance in the first place!
 

Disadvantage

The grantor has to give up all control over the Trust, the policy and any other assets.
 

Caution:

If the Trust is not structured with Crummey Powers or as a IRC Section 2503(c) Trust, the gift of the life insurance policy and any assets or monies to pay premiums are not present interest gifts and thus are not eligible for the annual gift tax exclusion.
 

 
 
 
 

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