ii It avoids having to determine the value of the existing policy at the time of the transfer. This value is known as the interpolated terminal reserve.
iii We are sure the insurance actually gets into the trust. All too often a planner creates the insurance trust and then it never gets funded, exposing the practitioner to unnecessary liability.
ii Care must be taken when selecting the beneficiaries of the trust to ensure that there are enough beneficiaries to shelter the value of the gift.
iii The trust must be funded with enough liquid assets in the event someone does wish to exercise their withdrawal rights.
2) A Crummey trust is designed to provided a limited withdrawal right to certain beneficiaries in an irrevocable trust so that transfers to the trust are eligible for the annual gift tax exclusion.
3) The more Crummey beneficiaries there are, the greater the gift that may be made to the trust without having to pay a gift tax. Crummey beneficiaries may not just be named at random, because they do have a real right to withdraw the money that is put into the trust.
4) Generally, a 30 day withdrawal right is considered adequate, but there is no clear minimum.
5) Particular care must be taken when drafting the Crummey power to ensure that the power lapses only the extent of the greater of $5000 or 5%. Any greater lapse will be considered a gift by that withdrawal beneficiary to the other beneficiaries of the trust.
6) The trustee should have broad powers to satisfy any withdrawal rights. All Crummey withdrawal rights should be satisfied either against the contribution or the property of the trust, including any insurance policy or fractional interests in the insurance policy. This will provide substance to a Crummey withdrawal right.
2) Upon the death of the grantor, the trust will either be taxed as a simple or complex trust depending upon the terms of the trust.
3) The practitioner must consider whether the Grantor’s Generation Skipping Tax Exemption should be allocated to the ILIT. The Code was revised under EGTRRA to provide an automatic allocation of the Grantor’s GST exemption in many cases and this is not always the most desirable result. A grantor may opt in or opt out of having the automatic allocation on a timely filed gift tax return.
2) It may sound obvious, but it is important to counsel clients that once money goes into an irrevocable trust, the money no longer belongs to them and they will have difficulty getting the money back.
3) If the Trustee is the Grantor’s spouse, care must be taken when making contributions to the trust to ensure that the Trustee spouse is not making any contributions. (i.e. Never contribute joint or community property to the trust or write a check to the trust from a joint account or a business account).
4) ILITs are somewhat expense to establish and maintain for many clients, particularly those who have large estates due strictly to the amount of insurance they buy. Consideration should be given to naming a child as the owner and beneficiary of the policy as a means to save money for the client while receiving many of the same tax benefits.
5) The client should make sure that the insurance premiums are paid on an annual basis to minimize the maintenance fees. If multiple insurance policies are in one trust, try to convince the insurance carriers to have the same due date for the premiums.
6) The life insurance trusts is a particularly useful planning tool for same sex couples and unmarried couples because it provides a means to give the decedent’s significant other a large sum of money tax free, yet control the money’s ultimate destination.
2) Whole Life Insurance – These policies are designed to build up a cash value to produce a guaranteed return that will ultimately pay for the insurance premium. The premiums can be quite substantial, which is important to know when calculating the number of Crummey beneficiaries that must be named. A contribution of a large whole life policy to an ILIT may result in a gift tax no matter how comprehensive the planning because of the size of the insurance.
3) Variable Life Insurance – This type of policy is similar to the whole life insurance except that instead of having a guaranteed return, the rate is variable. Since most people are not good investors, be wary of advising this product.
4) Second to Die Insurance - A Second to Die Insurance Trust is different from a typical ILIT in one substantial and obvious way - the insurance benefits are not paid until the second to die.
ii Since this trust is not for the benefit of the surviving spouse, the clients should be sure that the surviving spouse has enough funds to live on absent the trust funds.
iii These trusts are particularly beneficial for clients interested in dynasty trusts as more insurance can purchased for a lower premium amount.
2) Planning Considerations
ii Payment for the trust. I have yet to see a divorce decree or separation agreement that contemplates who will actually pay for the insurance trust. This is often a sticking point for many clients.
iii Compliance. Working with an unfriendly trustee or grantor can severely complicate compliance with both the tax laws and properly funding the trust.
2) The complexity comes when trying to explain the maintenance and funding requirements of the trust to clients. Further complicating matters, often clients will try to manage the trust completely on their own to save on costs. The practitioner must take extreme care when allowing this to happen because the practitioner will still be potentially liable.
3) Funding the Trust
ii Insurance must either be purchased by the trust or transferred into the trust. This requires completing insurance forms that designate the trust as the owner and beneficiary of the policy.