Irrevocable Life Insurance Trust Flashcards
If life insurance is taxable in the owner’s estate, what must be done to make it not taxable?
Don’t own it or have any interest in it
(AKA insured has no “incidents of ownership”)
What goes into gifting life insurance? (4 steps)
- Person gifting must absolutely assign the policy to another person/entity.
- Transferor may have to file gift tax return
- Wait 3 years for the transfer to become valid
- Don’t die in 3 years!
4 problems with other individuals owning the life insurance policy
- Loss of control
- Vulnerability of assets
- New owner could die first
- Difficult to find a good new owner
What is an alternative to gifting a Life Insurance Policy to avoid Estate Tax Issues?
Get an irrevocable trust to own the policy
What is a “Trust?”
A legally constructed entity capable of owning property and is recognized by the IRS as a separate tax entity
True or False:
Whether a trust purchases a life insurance policy or it is gifted, the “3 year rule” is still in effect.
False; having a trust purchase the policy avoids the 3 year rule
True or False
If a trust is revocable (as opposed to irrevocable), the life insurance policy is included in the estate.
True
3 Names/ways of defining an irrevocable trust agreement that contains provisions specific to the administration of life insurance policies
- Irrevocable Life Insurance Trusts
- Wealth Replacement Trusts
- Asset Replacement Trusts
What are the “pros” of a revocable life insurance trust? (3)
You don’t avoid estate taxes but…
- More Privacy
- Owner has more flexibility in directing the use of insurance proceeds upon death
- Avoid cost and time delays involved with probate
2 types of Irrevocable Life Insurance Trusts and their differences
- Funded ILIT - funded w/ insurance policy and additional assets (which can be used to pay premiums). Not often used
- Unfunded ILIT - funded only w/ insurance policy more common
“Present Interest,” “Future Interest,” “Contingent Interest…” What do these terms mean in the context of gift tax exclusions?
For a gift to qualify for the annual gift tax exclusion, the IRS requires that the gift must be of “present interest.”
Present Interest - enjoy immediate benefit
Future Interest - future benefit use
Contingent Interest - need an occurrence of event or subject to discretion of another
How does an irrevocable trust with Crummey Powers work?
(4 steps)
- Grantor makes a contribution to the trust
- Trustee sends out Crummey Letters to beneficiaries: “You have a right to withdraw your portion of the contribution.”
- Beneficiaries: acknowledge notice, but say “NO”
- Upon lapse of beneficiary withdrawal powers, Trustee uses contribution to pay premiums
When setting up Irreovcable Life Insurance Trusts, it’s important to have a ___ draft the trust and not ____.
Attorney
Not title it “Irrevocable Life Insurance Trust”
Trust should not direct ____ of insurance.
the purchase
Grantor (insured) cannot be the ___ of the Irrevocable Life Insurance Trust
Trustee
What does “Incidents of Ownership” mean?
Incidents of Ownership include:
- the power to change beneficiaries
- to cash in the policy
- to borrow against the policy
What happens if a Grantor has an incident of ownership?
They get in trouble with IRS, boi
The Trustee of an ILIT can’t be compelled to ___.
Pay estate taxes
Crummey Powers should exist for ___ or more.
30 days
Are multiple beneficiaries possible in an ILIT?
Yes
Are Crummey gifts to minors allowed?
Yes
True or False
There can be a pre-arranged understanding on the part of the beneficiaries that they will not exercise their withdrawal power.
False; this would invite the IRS into the situation
True or False
Surviving spouses are only allowed to be beneficiaries if they are dependents.
False; They can be beneficiaries. PERIOD.
True or False
Spouse should not be given Crummey Power
True
How do you avoid triggering a gift by the beneficiaries?
(Because a Beneficiary that lets a Grantor contribution lapse could be considered a gift to the trust FROM THE BENEFICIARY).
2 ways
- Limit the Crummey power to the greater of $5,000 or 5% of the trust.
- If Crummey power exceeds above, give the beneficiary the right to direct the disposition of the excess in his/her will.
True or False
It is better for the Grantor to purchase an insurance policy than an ILIT
False; you want that trust purchasing the policy if possible
It is necessary for notices of contributions (Crummey letters) to be given to beneficiaries in what form?
IN WRITING
Who should be the one paying premiums for an ILIT?
The trustee
When should a notice of contribution (Crummey Letter) be sent to beneficiaries?
Immediately upon contribution to trust
True or False
The lapse of a Crummey Power could potentially result in a taxable transfer on the part of the beneficiary who allows the power to lapse.
True
