Using Trusts in Planning
for Family and Estate Taxes
Request more information

  or call toll free to consult with an expert  1 888 456 1858 / 504-456-1858           

                                    Louisiana Life Insurance.com
   

Irrevocable life insurance trusts

Don't let a lack of planning turn into a 

 Time Bomb for your heirs and your business
An Estate Time Bomb May be Ticking !

Estate taxes could eat up your estate — even the life insurance money you wanted your heirs to have. An irrevocable trust may help you pass that life insurance money and any other assets you wish to your heirs tax-free.

 

*
What is an irrevocable life insurance trust?

*
What are the benefits?

*
Who should set up your trust?
* Life Insurance Trusts Exert Contol

 

An irrevocable life insurance trust is a trust that owns your life insurance policy.  It achieves it's goals due to it's nature of being irrevocable.  Anything, including life insurance, can be placed into and owned by an irrevocable trust.  The trust can pay policy premiums and pass death benefits (money) to your designated heirs when you die.

Why would you want a trust own your life insurance policy? Because if you keep any incedents of ownership of your life insurance policy, the death benefit will be counted as an  asset of your taxable estate — and may be subject to federal estate taxes.

Remember a life insurance policy death benefit is only income tax free. No income tax is due but your death benefit could still be eaten away by estate taxes (unless the death benefit goes solely to your spouse — possibly compounding the very same problems for her estate at a later date)

If your estate (including your life insurance) is at an estate taxable level, not only could you decrease your taxable estate by making gifts to the trust, but your heirs could use the money from the death benefit to pay your estate taxes.

If any of your heirs are unhappy with their inheritance, they won't be able to challenge or revoke the trust.

Because the legal and tax regulations surrounding trusts, you should have a knowledgeable estate-planning lawyer set up your trust(s). 

How do I fund the trust to pay premiums?

  • Give annual gifts. Each year, make a gift to the trust that equals your life insurance policy's annual premium. Your gift tax exemption applies to this amount annually and your spouses.

TOP                    

 



 

(Article)

Life Insurance Trusts:
A Way To Save Estate Taxes, Exert Control
Provided by the College for Financial Planning                                                                                               TOP        

DENVER - One of the enduring myths about life insurance is that its death benefits are tax-free. True, the proceeds are free of income tax for the beneficiaries. But those same benefits may be subject to tax in the estate of the insured.

That's the irony of buying life insurance to pay for estate taxes, often a strategy used by those whose gross estate exceeds the tax-free $675,000 limit. The policy proceeds intended to pay the estate tax bill become part of the bill themselves. Let's say you have an estate facing a federal estate tax of $200,000. If you buy a $200,000 life insurance policy to pay the estate tax bill, the proceeds will be added to the total value of your estate, and you'll end up owing at least another $75,000.

One way out of this dilemma is to set up an irrevocable life insurance trust, which takes over ownership of the insurance policy, says Michael Snowdon, CFP, CMFC, and the CFP Program Manager at the College for Financial Planning®. One of the big advantages of a life insurance trust is that it removes the life insurance from the estate of the insured.

The irony of buying life insurance to pay estate taxes is the policy proceeds become part of the tax bill.

The trust also may serve other ends. For example, at the death of the insured, the policy proceeds may remain in trust to provide regular income for the surviving spouse (while keeping the assets out of the spouse's estate). Or the trust may be used to distribute proceeds to children from a previous marriage.

A life insurance trust can be set up with a great deal of flexibility. For example, the trust can distribute a limited amount of the insurance proceeds over a period of time to a financially irresponsible child. Yet should that child suddenly have need of extra money, the trust can provide additional funds at the discretion of the trustee.

Despite the advantages of an irrevocable life insurance trust, it's important for anyone thinking about setting one up to keep these points in mind:

  • It's irrevocable. Technically, life insurance trusts are called irrevocable life insurance trusts, or ILITs. To keep the policy out of your estate, you must give up complete control over it. That means you can't change the beneficiary, cancel the policy, borrow against it, or otherwise alter the terms should circumstances change. You can't even legally compel the trustee (the person managing the trust) to use the proceeds to pay estate taxes. Consequently, the trustee should be someone who is competent and who you are certain will carry out your wishes (usually outlined in written instructions). A common choice is a close friend or a financial institution, but someone who is not a beneficiary.
  • The insurance can come back to your estate. If you transfer a policy into a life insurance trust, but die within three years of that transfer, the policy ownership reverts to your estate and the estate pays tax on the proceeds. One way around this risk is to have the trust buy a policy on the insured's life.
  • The beneficiaries can spend some of the trust funds. Whether you transfer a policy into a life insurance trust or have the trust buy a policy, you'll need to gift to the trust sufficient funds to pay the premiums. But to meet the gift-tax exclusion rules, you'll have to include what's known as a Crummey provision (named after a court case). This provision allows beneficiaries the opportunity to withdraw their share of the gift, typically within a certain time, such as 30 days. Most financial advisors recommend using the "five by five" rule, meaning that a beneficiary may take the greater of $5,000 or 5 percent of the trust assets as the limiting factor for the amount to be withdrawn. Obviously, if they do withdraw funds they've defeated the purpose of the trust. ·
  • Trusts cost money. Beyond the cost of paying for hefty insurance premiums, legal fees for a life insurance trust can easily run $1,500 or more.

In view of these drawbacks and risks, some might argue that it is easier to simply have the beneficiaries directly own policies on the life of the insured and dispense with the hassle of an ILIT. In some cases, this may be appropriate. However, the beneficiaries may not be mature or responsible enough to use the money to pay estate taxes or as otherwise intended by the insured. Also, divorce, bankruptcy, or a lawsuit against a beneficiary may allow access to the policy's cash value or the proceeds by the ex-spouse or creditors. An ILIT would prevent this. Separate policies also are more complicated if several beneficiaries are involved.

Licensed experts are always needed  for a personal analysis of your situation.
 Call us today! toll free!  1-888-456-1858 / 504-456-1858

Louisiana Life Insurance.com                                  Request  personalized information!

    FOR MORE CREATIVE IDEAS ON HOW TO CONSERVE YOUR ESTATE AND PLAN FOR YOUR FAMILY AND BUSINESS SURVIVAL CALL LOUISIANA LIFE INSURANCE.COM
TOLL FREE!    1-888-456-1858 / 504-456-1858
Request  more information