Risk/Insurance Exam 3 Irrevocable Life Insurance Trust (ILIT)

1. Uses of an ILIT 2. Tax Considerations of an existing policy given to a trust

1. Can be used to replace funds used to pay the estate tax, without the death proceeds also being subject to the subject tax. -Provide additional estate liquidity -You can include provisions in an ILIT that control how death proceeds are distributed -If you have children from a previous marriage but want your current spouse to be primary beneficiary of your estate, naming your children as beneficiaries of an irrevocable life insurance trust can provide them with a distribution at your death, rather than at your surviving spouses death. 2. If an existing policy is given to a trust, the value of the policy is subject to gift tax. Death benefits are generally received free of federal income tax.

1. Crummey Provision is used to..? 2. For the demand right to be legitimate, the trustee must provide the beneficiary with?

1. Give beneficiaries the right to demand withdrawal from the trust. If the demand right is not exercised the annual gift is then available for the trustee to use for premium payment purposes. 2. notice of annual trust contributions and provide an adequate amount of time, such as 30 days, for the demand right to be exercised

1. Objective of an ILIT? 2. Hows an ILIT funded?

1. To remove life insurance proceeds from the taxable estate so that the beneficiaries receive the entire amount undiminished by estate taxes. 2. By either transferring ownership of an existing life insurance policy to a trust, or by purchasing a new policy

USES OF AN ILIT 1. If your estate is likely to face a federal estate tax liability 2. If your heirs are likely to need additional estate liquidity after your death, such as to continue a family business 3. If you want to control how death proceeds are distributed, you can do so through

1. an irrevocable life insurance trust can replace funds used to pay the estate tax, without the death proceeds also being subject to the estate tax. 2. trust can provide that liquidity, again without the insurance proceeds being subject to the federal estate tax. 3. the provisions included in an irrevocable life insurance trust

Drawbacks of ILITs

You relinquish control of the life insurance policy and annual gifts made to the trust. -In addition, once the trust document is executed you cannot change the terms or terminate the trust - There are some expenses involved with Crummey withdrawals . -In addition to possible trustee fees, you should consult with an attorney in order to avoid unforeseen tax and distribution consequences

ILIT ACTIONS LIST 1. Grantor and Attorney: 2. Grantor, Trustee and Financial Professional: 3. Grantor: 4. Trustee: 5. Trustee: 6. Trustee:

1. draft and execute a trust agreement; name a trustee 2. transfer existing life insurance policy to the trust or apply for a new life insurance policy, naming the trustee as policy owner and beneficiary 3. makes cash gifts to trust 4. if applicable, send crummy withdrawal notices to beneficiaries. 5. Pay the life insurance premiums 6. upon the grantors death, manage the insurance proceeds and make distributions according to the terms of the trust.

1. Implications of transferring an existing policy. 2. Purchase of a new policy

1. if the gift of an existing policy is made within 3 years of the grantor/insureds death, the value of the life insurance proceeds are brought back into the estate for federal estate tax purposes. 2. If the grantor is insurable, its preferable to make cash gifts to the trust, which then purchases a new policy on the grantors life. Since the grantor/insured never held any "incidents of ownership" in the new policy, the insurance proceeds should not be included in the taxable estate, even if death occurs within three years of the insurance purchase by the trust.

USES OF AN ILIT 1. if you have children from a prior marriage, but want your current spouse to be the primary beneficiary of your estate 2. if you want to leave your loved ones a substantial life insurance estate 3. If you want to make a substantial bequest to a charity, either during your lifetime or at your death

1. naming your children the beneficiaries of an irrevocable life insurance trust can provide them with a distribution at your death, rather than at your surviving spouse's later death 2. trust can be used to pass the full value of life insurance proceeds to your heirs estate tax free. 3. trust can play a wealth replacement role, with the proceeds from the trust replacing for your heirs the value of assets given to charity

NAMING A TRUSTEE 1. Naming the insured as trustee will cause 2.The spouse can be named as trustee but the attorney may have to..? 3. however, second to die life insurance is used in the trust 4. why is it it is generally recommended that the trustee of an irrevocable life insurance trust not be the same as the estate's personal representative (executor).

1. the life insurance proceeds to be included in the insured's taxable estate 2. include special provisions in the trust agreement in order to avoid adverse tax consequences 3. the spouse should not be named as trustee 4. Conflicts between the trust and the estate may arise after the grantor's death.

ILIT Tax Considerations 1. if an existing policy is given to the trust...? 2. if death occurs within three years of giving an existing life insurance policy to the trust 3. Annual gifts made to the trust for premium payment purposes must be subject to the.. 4. the death benefit payable to the trust will not be included in the 5. Death benefits are generally received

1. the value of the policy is subject to gift tax, but only if it exceeds the annual gift tax exclusion. The value of the policy is generally based on the policy's interpolated terminal reserve value, a value that is usually close to the cash surrender value. 2. the value of the death proceeds will be brought back into the estate for federal estate tax purposes 3. Crummey withdrawal powers in order to qualify for the annual gift tax exclusion ($14,000). Alternatively, gifts will be subject to the unified federal gift and estate tax, but qualify for the lifetime exemption equivalent ($5,4500) 4. insured's taxable estate, assuming the insured held no incidents of ownership in the policy at death 5. free of federal income tax

DRAWBACKS OF AN ILIT 1. Since the trust is irrevocable 2. f the trust contains the Crummey withdrawal provision in order to qualify the gifts to the trust for the annual gift tax exclusion 3. expense involve

1. you relinquish control of the life insurance policy and annual gifts made to the trust. In addition, once the trust document is executed, you cannot change the terms or terminate the trust 2. a beneficiary may exercise his or her right to demand a withdrawal 3. In addition to possible trustee fees, you should consult with an attorney experienced in estate planning in order to avoid unforeseen tax and distribution consequences