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 grantorís
spouse for the benefit of their heirs.
If the Trust is designed correctly, the proceeds of the insurance will
not be included in the grantorís or grantorís spouseís estates and will
pass estate tax free to the beneficiaries.
Depending on state law, the proceeds may be not available to creditor of
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!
The grantor has to give up all control over the Trust, the policy and any
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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