Advantages: - 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.
Waiver - 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
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