WHY AN INSURANCE TRUST?

To achieve the optimum in financial and estate planning, one must "plan" to avoid or minimize all unnecessary taxes, legal fees and administrative costs. Such an estate plan should involve an analysis of the family's federal estate tax brackets whenever life insurance becomes part of the overall plan. Further, the interrelationship of the family's legal entities such as partnerships, corporations and trusts should also be scrutinized.

One goal of family financial planning is to provide for adequate liquidity to operate a family business or to assure the surviving family business or to assure the surviving family has enough money to live in the manner they have grown accustomed to living. Another goal includes the savings of unnecessary estate taxes at the death of a parent. In essence, for every dollar of insurance that is improperly owned, at least 37% will eventually be paid to Federal Taxes.

The History of Life Insurance and Federal Estate Taxes

When life insurance is owned by the insured, current federal law requires one-half of the community property interest and all of the insured's separate property interest to be "includible in the insured's estate" for estate tax purposes. There have been numerous attempts to avoid estate taxation by creating improper methods of cross-ownership, exercising the marital deduction and making incomplete gifts to other family members. The end result triggers an eventual tax that could be as much as 55% of every dollar of insurance coverage being paid to the IRS. By a properly drafted and timely funded Irrevocable Life Insurance Trust, this taxation is virtually eliminated.

The Irrevocable Life Insurance Trust

This Trust method provides for the greatest degree of flexibility and control allowable under current Federal Tax Laws. By using an Irrevocable Life Insurance Trust, the insured is able to accomplish both personal objectives with respect to the management and conservation of assets and tax planning objectives that could not otherwise be accomplished with outright gifts.

Under this Trust arrangement, the Settlor gives up all of his rights to the ownership of the insurance policy. The trust provisions prevent beneficiaries from obtaining full use of the property until a certain time or specific event takes place. Moreover, the economic benefits of insurance owned by an Irrevocable Life Insurance Trust may be apportioned among the beneficiaries differently as circumstances warrant from time to time. Therefore, this trust method provides continuing flexibility to carry out the desires of the insured after his death.

With proper planning, assets of the estate can be purchased by the Irrevocable Life Insurance Trust and remain in trust to a future date. Upon the collection of any insurance proceeds, the Trustee has the authority to loan money to the estate to provide liquidity to the estate for the payment of death costs and taxes.

It should be noted however, that not all estate taxation is avoided immediately upon the transfer of a life insurance policy to an irrevocable trust. Unusual and inconsistent Federal Estate Tax law requires that the insured must live three years from the date of transfer of such insurance policies to this trust to avoid estate taxation altogether.

While the Irrevocable Life Insurance Trust may not be for everyone, any insured who carries any moderate amount of life insurance should explore the tax savings created by the use of this Trust. The actual drafting and funding process, along with the legal expense incurred result in substantial tax savings when compared to the 37% to 55% taxation on such insurance proceeds. It should also be noted that if the Trust is properly drafted the assets contained in the trust will avoid probate upon the death of the insured.