Ch 3 - Irrevocable Life Insurance Trusts Flashcards
Wealthy grantors need all the exemptions exclusions and credits
Annual exclusion is 14k
Applicable credit is the remaining 5,250,000
How are ILIT Gift Taxes handled aka minimized?
Avoids /minimizes gift, estate, and GST taxes
Maximizes annual exclusion giving
Provides liquidity for the estate
Avoids probate
Provides for distribution by grantor’s terms
What are the 5 benefits of an ILIT?
Applies to all non marital gifts in a tax year
Requires consent on tax return 709
Unavailable after spouse dies
What is gift splitting with a spouse?
*Beneficiary given temporary right to withdraw a pro rata share of the gift up to the annual exclusion amount
*the crumney trust & the notice requirement
*IRS position: adult beneficiaries must receive notice, beneficiaries cannot waive right to notice, minors can probably be ignored
What is the present interest requirement for the annual exclusion
*Must create & fund ILIT by trustee applying for policy & placing funds in cash equivalents
*mail notices for at least 15 day power
*crummey rights lapse
trustee pays premium
What audit proof do you need for a crumney trust?
Donor has 14k annual tax exclusion
Beneficiary make taxable gifts if they lapse a crummey power in excess of the greater of 5000 or 5% of the principal
What problems can arise when there is a large premium
Stack beneficiaries
Cristofani case
Keep lapse non taxable
Limited retained powers
Hanging powers
Permanent powers
How can you succeed with large premiums
Submit unpaid application or memo
Determine insurability
Create ILIT trustee applies & pays for policy
How is the insurability process handled
Gives trustee power to buy estate assets
Gives trustee power to loan cash to executor
Makes sure will gives executor matching power
How does an ILIT provide estate liquidity but not estate taxes
Trustee distribution power
Super trust power
Trust protectors
Court authorized amendment
Grantor or new ILIT purchases policy
Spousal benefit extinguished by divorce
How can the ILIT be revoked
Many commercial trust companies are wary of ILIT assist trustee with due diligence
Provide regular inforce illustration checkup
Remember that variable policies add to trusts risk
What the the fiduciary concerns
Provide ILIT for grandchildren
Effective use of GST exemption 5.25 m in 2013
States have begun to eliminate rule against perpetuity es Normal gift & estate tax issues still apply (crummey powers for gift tax)
Allocation of GST exemption on gift tax return
- crummey powers don’t work bc GST annual exclusion is defined differently to be restricted to direct skips trusts
What is the purpose of dynasty trusts
Manage 1st death needs
Premiums after 1st death must be managed
What must you think of with survivorship & ILITS
Funds should not be left outright if conservatorship is anticipated
Funds could be left to other heirs who might be morally bound to provide assistance
Funds could be left in a discretionary ILIT with no support requirement and other heirs are vested remainder persons
What are the planing steps for life insurance for special needs heirs
