Gift Taxation Issues with Second-to-Die “Survivorship Life” Insurance Policies

Gift taxation becomes an important planning issue when a married couple wants a very large policy to be owned by a third party so it will not be included in their estates and also wants to make gifts of premiums at minimal gift tax cost. If a son or daughter, for instance, owns the policy outright, the parents may make tax-free joint gifts of up to $32,000 (as indexed for inflation in 2022) each year under the annual gift tax exclusion. If annual gifts in excess of the annual gift tax exclusion amount are necessary, the parents will have to use up part of their unified gift and estate tax credit.

The parents can leverage the amount qualifying for the annual gift tax exclusion by making gifts to multiple beneficiaries, which is most appropriate if the parents have several children. However, as they include more independent donees in the arrangement, the risk increases that donees may not use the gifts as intended to pay the required premiums. Also, outright ownership of the policy by the parents’ children presents other related problems. The parents have no assurance that the children will not raid cash values and essentially undermine their not-so-well-laid-out plans.

One can avoid these problems by using an irrevocable life insurance trust to own the policy. Through proper planning and use of the Crummey withdrawal rights, the parents can provide up to $32,000 (as indexed for inflation in 2022) of annual premium gift tax free to the trust for each primary and contingent beneficiary of the trust. In addition, they can put certain restrictions on how trust assets are used for the benefit of the beneficiaries and when principal passes to the beneficiaries.

Reproduced with permission.  Copyright The National Underwriter Co. Division of ALM

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