Irrevocable Trusts Life Insurance (ILITS) are planning tools used to maintain the benefits of life insurance outside the estate liabilities.
For example, if a married couple has an estate of 6 million, they can pass 4 million to the new generation with no tax if the trust was established adequate to exploit the maximum lifetime unified credit. That leaves 2 million remain subject to tax under current law.
The logical thing is to buy a survival life insurance policy for the projected tax. However, a policy of buying in the most people are familiar with the problem is not resolved, but worse.
If the couple has "incidence of ownership" in politics, to be included in the estate. The purchase of a policy of one million mass increases of $ 7 million dollars. Four million passes tax-free, but now the passive mass is 3 million. This increases the tax about $ 225,000.
Enter the Irrevocable Trust Life Insurance
Attorneys draft Irrevocable Life Insurance Trusts. The trust will apply for its own identification number federal tax. The trust then applied to the survival of life insurance policy. Will the applicant, owner and beneficiary of the policy. Typical wording is "The John and Mary Smith Irrevocable Life Insurance Trust April 5, 2007, JPMorgan Chase Bank, trustee. "
In this example, since neither John nor Mary has "incidence of ownership" in politics, will not be part of their passive assets.
The owner and beneficiary
Unlike using a Ilit, I have worked with some cases where the only child or children are the owner and beneficiary. This might work. However, each year the parents gift the money to pay the premium, there is no guarantee that the money be used to pay the premium. Moreover, children, as owners, have access to cash values. A Ilit has a lot more security.
I administrator seen as a child, spouse, lawyer, accountant or a longtime friend of the family. All these will work, but a bias of a third party such as a bank, is much better. If an individual is the trustee, the name of a bank as the successor trustee. Banks do not die.
The Crummey Letter
Typically, life insurance premiums are paid by parents in the form of annual grants to the Life Insurance Trust irrevocable. Currently (2007) a person can give up to $ 12,000 Each year as many as they wish without paying gift tax or the amount subtracted from their lifetime exclusion. However, these gifts must be "present gifts interest "which means that the recipient must have immediate rights to the donation.
Gifts to Ilit, to pay premiums on a policy life insurance ownership Ilit, not "present interest" gifts. A "Crummey" letter qualifies the gift as a "topical" gift. The letter is not crummy or poorly written, the letter takes its name from a court case initiated in 1968 by Clifford Crummey, who was trying to do the same: to make gifts current annual interest gifts. Ultimately, the outcome of the case required the use of a letter, now known as the "Crummey" letter.
A letter is sent annually to each of the beneficiaries of the Illit. It simply says that a gift has been made to Ilit and can withdraw it if he wants within a specified period, usually 30 days or 60. If you do not exercise this right, the gift becomes a present interest gift.
Obviously, there is an "understanding" between parents and children to ignore these letters, since it is part of a succession plan in general. The annual gifts and the subsequent year Crummey letters do not have to go to the children with legal capacity, such as the age of 18. I have seen letters written to 4-month-old infants. In this case, although the baby does not was able to read the letter or understand the estate planning logic behind it, not to exercise its right to the donation. Phew, another legal bullet dodged.
As you can see, it is very important to organize the annual drafting of these letters Crummey. Some departments of banks confidence to the opening of this facility if they were the trustee of the trust. This was just a courtesy they would never see or manage any life insurance products.
The best bet is to his lawyer letters. I have a client whose law firm (under a set of written instructions) is announcing the premium life insurance company sent your company, prepare and send the Crummey letters and then pay the premium. All the customer has to do is open a letter each year from the law firm that indicates a premium and must send a check. Besides, they do not have to lift a finger. Friendly service.
If you have a property that is subject to taxes on goods and his aides suggested a life insurance policy to pay the tax at a discount, be sure to evaluate the use of an irrevocable life insurance Trust.
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