Estate Planning, Probate and Immigration Attorney of Los Angeles, California

Life Insurance Trust

An insurance trust is generally an irrevocable trust that owns insurance on the life of the grantor or grantor and spouse. The trust is designed to avoid federal estate taxation of the insurance proceeds on the deaths of the grantor or spouse. When premium payments or other gifts to the trust are made, the trust instrument grants specified beneficiaries Crummey withdrawal rights over the gifts so that they will qualify for the federal gift tax annual exclusion. These trusts would generally file a Form 1041 as a complex trust, if the $600 income requirement were met.

An Irrevocable Life Insurance Trust (ILIT) makes it possible to:

• Remove life insurance death benefits from the taxable estate on the death of the insured;
• Allow the grantor to control the disposition of the policy and the death proceeds;
• Utilize the client’s annual gift tax exclusion to pay the premiums;
• Provide significantly increased asset protection during lifetime; and
• Provide the grantor with indirect access to the cash value build-up inside trust-owned insurance policies.

By removing the death proceeds from the insured’s taxable estate, the amount actually passing to the beneficiaries is, in effect, doubled (assuming a 50% tax) because the tax is avoided. Viewed another way, the client could reduce premiums to half of what they’re currently paying and receive the same real coverage.

The primary objective of an Irrevocable Life Insurance Trust (ILIT) is to make proceeds of life insurance policies available to trust beneficiaries in a manner that will not subject the policy proceeds to estate tax upon the death of the insured (and if married upon the death of the insured's spouse).

Another common objective of the trust is to qualify transfers to the trust, which will most likely be used for payment of insurance premiums, for the federal annual gift tax exclusion. This may be accomplished through the use of Crummey withdrawal rights.

An ILIT should be considered a sophisticated tax planning tool involving complex and changing gift tax, estate tax, generation skipping transfer tax and income tax issues.

The primary objective of an Irrevocable Life Insurance Trust (ILIT) - Second-to-die policy with spousal access trust option is to make proceeds of second-to-die life insurance policies available to trust beneficiaries in a manner that will not subject the policy proceeds to estate tax upon the death of the survivor of the Grantor and the Grantor's spouse.

During the life of the Grantor's spouse, discretionary distributions can be made to the spouse. This is commonly referred to as a Spousal Access Trust and is supported by PLR 9748029. Remember IRC Section 6110(i)(3) provies that a PLR may not be used or cited as precedent and is only directed to the taxpayer who requested it.

Another common objective of the trust is to qualify transfers to the trust, which will most likely be used for payment of insurance premiums, for the federal annual gift tax exclusion. This may be accomplished through the use of Crummey withdrawal rights.

The primary objective of an Irrevocable Life Insurance Trust (ILIT) - 2nd-to-die joint trust is to make proceeds of 2nd-to-die life insurance policies available to trust beneficiaries upon the death of the surviving Grantor in a manner that will not subject the policy proceeds to estate tax upon the death of the insureds.

Another common objective of the trust is to qualify transfers to the trust, which will most likely be used for payment of insurance premiums, for the federal annual gift tax exclusion. This may be accomplished through the use of Crummey withdrawal rights.

An ILIT should be considered a sophisticated tax planning tool involving complex and changing gift tax, estate tax, generation skipping transfer tax and income tax issues.

Contact Info

SNC Law Office

21021 Devonshire Street, Suite 202

Chatsworth, CA 91311

Phone: (818) 714-1789

Fax: (818) 530-4367

SNCLAWOFFICE@GMAIL.COM

SC@SNCLAWOFFICE.COM

Areas Served

SNC Law Office represents clients throughout the entire San Fernando Valley, including the communities of Santa Clarita, Oxnard, Thousand Oaks, Ventura, La Crescenta, Pasadena, Glendale, Burbank, Santa Monica, Malibu, Encino, West Lake Village, Agoura Hills, Moor Park, Simi Valley, Camarillo, West Hills, Winnetka, Ventura County, Los Angeles County, Orange County, and San Bernardino County.