Life insurance is an almost magic tool in estate planning. But because its utility is diminished in direct proportion to the taxes imposed on it and the security it provides becomes elusive, often it makes sense for highly successful clients to give it away. Gifts of life insurance offer special planning opportunities not available with other assets.
- Life insurance proceeds can be removed from a client’s estate at a relatively low gift tax cost. Compare this with most other property, which has the same value for gift tax purposes as it does for estate tax calculations.
- A gift of other assets may result in a loss of a stepped-up basis to the client’s heirs. But a gift of life insurance does not result in such a loss in income tax savings; there is generally no income tax payable on the proceeds and the loss of a step-up in basis is no concern.
- Psychologically, life insurance is an easier gift for a client to part with than most other assets since it is not income-producing and is generally thought of as a post-death security vehicle for others.
There a number of advantages and disadvantages, as well as important details, to consider when helping clients understand the use of irrevocable life insurance trusts in the planning process. These include:
- Advantages of ownership of life Insurance by third party
- Disadvantages of third party ownership of life insurance
- Why make a gift of life insurance to an irrevocable life insurance trust?
- Disadvantages to ownership of life insurance by an irrevocable trust
- Irrevocable trust—what it is and how it works
- Selection of a trustee
- Reducing or eliminating gift taxes on policy transfers and premium payments through Crummey powers
- Gift, estate, and income tax problems related to Crummey powers
- Reducing or eliminating gift taxes on premium payments through methods other than Crummey powers
- What the attorney should consider in drafting
- How to avoid the transfers within three years of death rule
- Structuring the trust for “what ifs”
- Allocation of the federal estate tax
- Income tax implications
- How to handle last to die (survivorship) insurance in an irrevocable trust
- How to handle group term life insurance in an irrevocable trust
- Community property issues
Reproduced with permission. Copyright The National Underwriter Co. Division of ALM