Business News & TipsAlan S. Moore / L’Observateur / November 4, 1998When looking at alternatives for your estate plan, you may consider making charitable gifts. If so, how do you ensure that your beneficiariesare provided for? Your estate may be at the level where estate taxes will be due at the death of the second spouse. So how do you provide the estatewith liquidity to pay the estate taxes? A life insurance trust can work in conjunction with a charitable remainder trust to replace the wealth that is gifted to the charity. If you have nocharitable intents, the irrevocable life insurance trust is an excellent tool to provide your estate with liquid assets to cover any estate tax liability.
Published 12:00 am Wednesday, November 4, 1998
To make this “wealth replacement” arrangement effective, an irrevocable life insurance trust is most advantageous. Since the death benefits of lifeinsurance policies are included in the insured’s estate, using an irrevocable trust to hold and own the life insurance policies will remove that death benefit from the insured’s estate, thereby further decreasing the insured’s taxable estate.
Once this trust is drafted and a trustee is chosen, the premiums for the policy should be gifted to the trustee and the trustee will purchase the policy on the insured and continue to make premium payments with the gifted amounts. Having the trustee purchase the policy in the trust is morebeneficial than transferring a life insurance policy to the trust because of the Internal Revenue Codes’ “in contemplation of death” rules. If you diewithin three years of gifting the policy to the trust, the IRS will treat the policy proceeds as part of your estate. Having the trustee purchase thepolicy in the trust avoids this potential hazard.
Once the trust is established and an insurance policy purchased, you will send the premium payments to the trustee who will then forward the payment to the insurance company to keep the policy in force. The IRS hasstated that if the life insurance trust meets a certain condition, called a “Crummey” provision, the annual premium would qualify as a current gift for the annual exclusion. This means the premium paid would also beremoved from your gross estate with not gift tax liability for money gifted up to the annual exclusion per year per beneficiary.
Beginning in 1998, the $10,000 annual exclusion for gifts will be indexed for inflation and rounded to the next lowest multiple of $1,000. ACrummey provision allows the beneficiaries the right to withdraw the premium from the trust for a certain amount of time. The typical timeframe to withdraw the money is 30 days after the transfer of the premium to the trustee. If no beneficiary exercises his or her right to withdraw theassets, then the trustee pays the premium and the policy stays in force.
The key motivation for the beneficiaries not to withdraw the assets is, of course, the future benefit – $10,000 today or the full face amount of the policy in a few years. Needless to say, most beneficiaries choose to wait.
(Alan S. Moore is a financial advisor in the New Orleans office of LeggMason Wood Walker, Inc., a diversified securities brokerage and financialservices firm that is a member of the New York Stock Exchange, Inc. andSIPC.)
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