Life Insurance Trusts


  •     Protection against creditors
  •     Use of a professional to manage the assets
  •     Protection when the donee is immature
  •     Remove the assets from the insured estate while available at death
  •     The principal may be invaded via the spouse and this without taking into consideration other resource available
  •     May maximize the advantages of a Qualified Personal Residence Trust
Life insurance can be used for the following reasons:
  •     · Providing cash for expenses associated with death (such as death taxes)
  •     · Replacing property or income that is lost upon the insured’s death

For a closely held business, the life insurance can provide the following:

  •      Funds needed for a buy and sell agreement
  •      Provide capital to assist the business in surviving the loss of a key employee or the owner
  •      Important benefit program for employee and owner 
  •      Can provide creditor protections 
  •      Provide liquidities for payment of estate taxes       

Watch Out-3 Year Rule

  •   If an insured dies within three years of giving a life insurance policy to an irrevocable trust, the proceeds are included in the insured’s gross estate
  •   Lost in flexibility and access to the policy’s cash values
Create Trust, Then Apply for Insurance
  • Trust is policy beneficiary
  • Establish the trust before the life insurance policy is issued, because the trust will 
    • be the applicant on the insurance applications
    • pay the initial premium, and 
    • be the owner of the policy.  
Avoids “three year” rule.If the life insurance policy is already issued, 
  • Insured assigns ownership of the policy to the trust
  • “Three year” rule applies  

Trust Operating Procedure
  • Trustee  transfers money to Trustee to pays the premium
  • Gift to trust is a taxable event
    • Reported to the IRS by filing a gift tax return Form 709 
    • File following year at the same time the insure files his/her federal income tax return
    • Each contribution is considered a gift

Richard Mayberry works closely with top notch insurance professionals.  Call 703-714-1554 for referral.

Selection of Trustee
  • Trustee shall be a different person than the insured-settlor
  • Penalty for violation rule-trust will remains in the asset of the insured-settlor
    • Spouse can be the trustee if the trust owns a single life policy and distribution can be made to the insured’s spouse. 
    • If trust owns a second-to-die policy, the spouse cannot be trustee nor receive distributions. 
Crummey Letters
  • Annual exclusion, currently $13,000 per donee, is only available for gifts of a “present interest”  
  • Gift of a life insurance to a trust is a non-qualifying gift of future interest.  
Convert future interest to present interest with notice to the beneficiaries of the followings rights:

  • Notice of the right to make a withdrawal
  • Notice of each gift to which the withdrawal relates
When there are minors: Notice to the guardian or the minor’s parent.  

  • The Service appears to  have taken the position that notice cannot be waived by the beneficiary
  • Oral notice will probably suffice as long as the power holder actually is informed of his/her right
  • Prepare written notice to reflect Notice 

Characteristics of Proper Notice

  • Inform the beneficiaries that the only expected gifts to the trust are the premiums gifts
  • Gives the beneficiaries a schedule of the dates on which premium gifts will be made to the trust
  • Informs the beneficiaries of their demand rights
  • Promises supplementary information only if there are not made according to this schedule
  • Not required to be sent to the beneficiary who is also the trustee
  • Detailed enough to give the beneficiary a meaningful interest in the property given to the trust. 
  • Beneficiary must be given a realistic opportunity to actually withdraw the settlor’s contribution. 
  • Use short as you are comfortable with: In Estate of Cristofani v. Commissioner, the Tax Court held that fifteen-day withdrawal period was sufficient.
Impact  Trustee Selection

  • Most are not good at keeping track of the Crummey notices
  • Use counsel or CPA