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LIFE
INSURANCE TRUST – IRREVOCABLE LIFE INSURANCE TRUST (ILIT) When
an irrevocable (Crummey) trust is created, the grantor makes annual gifts to the
trust equal to annual life insurance premiums; the annual premiums qualify as an
annual gift exclusion; at the grantor’s death, the life insurance proceeds
pass to the named beneficiary income tax and estate tax free. Benefits:
Reduction of the estate tax through the use of the $10,000 annual gift
tax exclusion; avoidance of estate taxes on the life insurance proceeds;
provides liquidity for estate tax and family expenses. Concerns:
Loss of control over the trust proceeds.
Since it is an irrevocable trust, the grantor of the trust will no longer
have control of the life insurance policy that will used to fund the ILIT. TAX
ADVANTAGES: The use of annual gift tax exclusion allows the
grantor to substantially reduce death taxes that would otherwise be accessed. NOTE:
A Revocable Life Insurance Trust (RLIT)
established for a specific purpose (i.e., higher education for a child) and to
be funded with life insurance proceeds can be created but there are no tax
advantages at the federal level. At
the state inheritance tax level, insurance proceeds are not taxable.
The revocable life insurance trust does allow the grantor to prescribe
the terms of the trust, trustee, beneficiary, amount, frequency of payments and
what happens to any remaining funds when ‘college’, for example, is
complete. Also once funded after
death, the trust becomes irrevocable unless its terms say otherwise. Ó 2000 James
W. Pearson, Jr., All Rights Reserved FOR ADDITIONAL INFORMATION CALL THE TOLL FREE HELP LINE 1-800-232-1477 E-mail: lawyer@lawwalk.com JAMES
W. PEARSON, JR. Chair of the Federal & State Credit Union Department & Coordinator of legal consultations under the Family Legal Care Plans offered to credit union members. |
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