What is a life insurance trust?
Death benefits paid on a life insurance policy pass to the beneficiaries of the policy free of income taxes. But life insurance proceeds may be subject to federal estate taxes instead. You can make sure that your life insurance pays your beneficiaries free of both federal estate taxes and income taxes by having your insurance owned by an irrevocable life insurance trust. According to Wealth Enhancement & Preservation (The Institute Inc. , Denver), Because your irrevocable life insurance trust will be considered the owner of the life insurance upon your death, the value of your life insurance will be excluded from your gross estate. There is one exception to this estate tax-free rule, however. If you transfer the ownership of an existing policy on your life to your irrevocable life insurance trust and you die within three years of the transfer, the entire value of the policy is brought back into your estate for federal estate tax purposes. To guard against such a trap, some financial experts say that you should have the trustee of your irrevocable life insurance trust purchase a new policy on your life so that if you die within three years, the policy is excluded from your estate.
What is a Crummey Trust?
A Crummey trust is a type of irrevocable life insurance trust that allows the trusts beneficiaries to demand that the trustee pay them their share of the monies contributed to the trust within a specified period. The name comes from D. Clifford Crummey, whose court case resulted in the approval of the demand right technique. Those rights, called Crummey rights or Crummey power, have since been expanded to beneficiaries of many other types of trusts as well.
What's the purpose of establishing an irrevocable life insurance trust?
The aim of an irrevocable life insurance trust is to keep the death benefits from a life insurance policy outside of the policyholders estate and thereby remove the chance that the proceeds will be subject to a federal estate tax that can reach as high as 55%. According to Wealth Enhancement & Preservation (The Institute Inc. , Denver, Colo. ), A properly established irrevocable life insurance trust owns life insurance on the life of the trust maker, thereby keeping the life insurance proceeds outside of his or her estate and avoiding federal estate tax (federal income tax is also avoided for different reasons). An irrevocable life insurance trust keeps policy proceeds free of federal estate tax upon the death of the trust maker and also on the subsequent death of his or her spouse. The proper use of this type of trust allows the trustees to satisfy the trust makers estate settlement costs and death tax obligations without subjecting the insurance proceeds to those costs and taxes. By utilizing this planning vehicle, a 50% federal estate tax bracket taxpayer can purchase half as much life insurance as he or she would own personally and still get the same after-tax insurance benefit for his or her beneficiaries. Or he or she could double the amount of the coverage passing to his or her beneficiaries without paying a dime more of premium.
Is there a way to have access to the cash value of life insurance owned in an irrevocable life insurance trust?
The cash value of a life insurance policy held within an irrevocable life insurance trust generally cant be touched. But using a special split-dollar arrangement can make the cash accessible. According to Wealth Enhancement & Preservation (The Institute Inc. , Denver, Colo. ), A significant problem with purchasing life insurance in an irrevocable trust is that the cash value of the life insurance owned by the trust will be outside the reach of the trust maker during his or her lifetime. A family split-dollar arrangement structures the ownership of the life insurance policy so that the insurance coverage is owned and held by the irrevocable life insurance trust, and the cash value or investment component of the policy is held separately by the trust makers spouse without causing the insurance death benefit to be included in the makers estate for federal estate tax planning purposes.
Who should I pick as the trustee of my irrevocable life insurance trust?
When you're deciding whom to name as the trustee of your irrevocable life insurance trust, you should automatically scratch both your name and the name of your spouse from the list. According to Wealth Enhancement and Preservation (The Institute Inc., Denver CO), It is very clear under tax law that you should not be the trustee of an irrevocable life insurance trust that you set up. The trustee probably should not be your spouse either. Many planners suggest that a good trustee for an irrevocable life insurance trust might be the local bank trust department. Bank trust departments deal with irrevocable trusts on a regular basis, as do accountants. Because of the technical nature involved in the administration of an irrevocable life insurance trust, it may not be a good idea to use individuals as your trustees unless they are extremely well versed and competent to handle the technicalities involved.
See how we can help you.