Life Insurance Trust

[Stormy Kromer]

Hello friends. I am in a position where I may consider a Life Insurance Trust. I have a pile of life insurance $1.5 cash value with an additional $1.1 million death benefit. That's $2.6 million that our state would tax our estate at 13%. About $400,000. My main concern is the cost of setting up a Life Insurance Trust and the annual cost to maintain it.

The main (only) purpose would to avoid a very aggressive state estate tax. We are way over the state limit for estate/tax and just under the federal limit. Taking our life insurance out would help a great deal to lower our estate tax . Does anyone on this forum have any direct experience with a Life Insurance Trust that could offer advice?

Thank you.

 

[Koolau]

I'm ignorant about Life Insurance Trusts. Can you briefly explain to us (me?)

 

[SecondCor521]

My parents set one up a long time ago.

They paid an attorney to consult with them and write up the life insurance trust document. I don't know how much that was, but if you find an attorney who has written one before, it's probably an hour or two of their time to do a global search and replace on the names. So probably $500.

After that, there really should be no cost to maintain it. You need to change the owner of the policy to the trust and beneficiary of the life insurance policy/policies to be the trustee of the trust. Give copies of the trust document to your successor trustee.

That's about it, unless any of the policies still have premium payments. Then you might have to open a checking account in the name of the life insurance trust in order to pay those premiums. Provided they are small enough, you can gift enough to the trust to pay the premiums. You'd also need to send Crummey letters to any trust beneficiaries.

That's about it.

 

[SecondCor521]

I'm ignorant about Life Insurance Trusts. Can you briefly explain to us (me?)

ILITs, or Irrevocable Life Insurance Trusts, are containers in which you can put life insurance policies. Doing so moves the proceeds of the life insurance policies out of the person's estate. So they help avoid/minimize estate taxes for folks who might need to worry about that.

(My parents set theirs up a long time ago when the estate tax limit was a lot lower than it is today. They just left things that way once it was set up.)

 

[luckydude]

I assume you are looking at an irrevocable life insurance trust (ILIT) for estate planning purpose. You can set up the trust yourself or hire an estate planning pro. Then you have to purchase a policy from an insurance provider to place in the trust. Whole life insurance policy is typically used for this purpose.

The annual cost is essentially the premium that you pay into the policy to fund it; ideally you will use the annual gift exemption amount for that purpose. You just have to make sure to generate crummey letters to beneficiaries annually (the letter notifies the ILIT beneficiaries that a gift---essentially the annual insurance premium---has been made to the trust) to document that these annual premium payments are gifts for tax purposes.

DW and I set one up for our kids a few years ago.

 

[Koolau]

ILITs, or Irrevocable Life Insurance Trusts, are containers in which you can put life insurance policies. Doing so moves the proceeds of the life insurance policies out of the person's estate. So they help avoid/minimize estate taxes for folks who might need to worry about that.

(My parents set theirs up a long time ago when the estate tax limit was a lot lower than it is today. They just left things that way once it was set up.)

I assume you are looking at an irrevocable life insurance trust (ILIT) for estate planning purpose. You can set up the trust yourself or hire an estate planning pro. Then you have to purchase a policy from an insurance provider to place in the trust. Whole life insurance policy is typically used for this purpose.

The annual cost is essentially the premium that you pay into the policy to fund it; ideally you will use the annual gift exemption amount for that purpose. You just have to make sure to generate crummey letters to beneficiaries annually (the letter notifies the ILIT beneficiaries that a gift---essentially the annual insurance premium---has been made to the trust) to document that these annual premium payments are gifts for tax purposes.

DW and I set one up for our kids a few years ago.

Thanks. I think I get it now. I can see it doesn't likely apply to me at this point.

Maholo

 

[Kings over Queens]

Hello friends. I am in a position where I may consider a Life Insurance Trust. I have a pile of life insurance $1.5 cash value with an additional $1.1 million death benefit. That's $2.6 million that our state would tax our estate at 13%.

Not to dissuade you from learning more and setting up a trust, but, my understanding is that life insurance proceeds paid to beneficiaries pass tax free. some things will negate the tax benefit, such as deducting the premiums from your income tax.

 

[ncbill]

Not to dissuade you from learning more and setting up a trust, but, my understanding is that life insurance proceeds paid to beneficiaries pass tax free. some things will negate the tax benefit, such as deducting the premiums from your income tax.

State could still charge that hefty estate tax on the value of the proceeds to the OP's estate, if OP retains ownership of the policy.

An irrevocable life insurance trust (ILIT) would avoid that, & with such a significant state estate tax plenty of local lawyers will be familiar with the process.

Might be taxes on transfer of policy into trust, depending on its current value.

 

[Koolau]

Yeah, unless tax laws regress, I don't see myself ever worrying about estate taxes though YMMV.

 

[SecondCor521]

Yeah, unless tax laws regress, I don't see myself ever worrying about estate taxes though YMMV.

They regress by 50% on 1/1/2026 unless Congress acts. Still will be ~$7M at the federal level, which is good enough for almost everyone.

Some states also have estate/inheritance taxes, and some of them kick in at levels much below that $7M federal number.

 

[Koolau]

They regress by 50% on 1/1/2026 unless Congress acts. Still will be ~$7M at the federal level, which is good enough for almost everyone.

Some states also have estate/inheritance taxes, and some of them kick in at levels much below that $7M federal number.

Heh, heh, still no problem here.

 

[Flyfish1]

We have had two ILIT's for many years, his and hers. If you are in a position to worry about estate taxes the cost of setting them up should not be a worry. We worked with an estate planning attorney many years ago. Maintaining them is nothing, just some paperwork and maintaining separate checking accounts for them.

 

[Stormy Kromer]

Thank you Flyfish1.

We are in a state that has a low threshold for estate/inheritance tax. We plan on leaving the Life Insurance to our heirs as efficiently as possible.

I think we need to visit an attorney soon.

Life insurance and death benefits are included in a a taxable estate. Our state begins taxing estates at $3 million. I am patriotic as can be but I don't want to leave 20% of my net worth to a state where I live....

 

[Flyfish1]

Wow Stormy that is a low threshold for a State. Curious where that is if you don't mind sharing. I agree with you, there is no reason to have to pay that tax when an ILIT will help you. Easy to do, may cost a couple of grand or so to set up.
I'm in CT and I think the threshold is $13.6M. Not going to be a problem for me...lol.

 

[CaliKid]

Generally speaking the key with an ILIT is the death benefit AND the ownership are not in your name. That is why it is not taxed in your estate at death. Another option is just doing a "change of ownership" to your chosen beneficiaries. Obviously, this requires death to happen in order but cheaper/easier than an ILIT. On the other hand an ILIT can be written to include creditor protection for your chosen beneficiaries which can be pretty powerful. Definitely talk to an experienced estate planning attorney. This is not an area to find a generalist attorney nor do I recommend doing it yourself. Good luck.

 

[medved]

Definitely talk to an experienced estate planning attorney. This is not an area to find a generalist attorney nor do I recommend doing it yourself. Good luck.

I agree that a "general practice" attorney is not the right choice here -- and it is certainly not a DIY project. However, for a competent trusts and estates attorney, this is very straight-forward. For T&E attorneys whose client base is HNW/UHNW people, it tends to be a part of the standard package.

 

[Stormy Kromer]

Wow Stormy that is a low threshold for a State. Curious where that is if you don't mind sharing. I agree with you, there is no reason to have to pay that tax when an ILIT will help you. Easy to do, may cost a couple of grand or so to set up.
I'm in CT and I think the threshold is $13.6M. Not going to be a problem for me...lol.

I am in Minnesota. I live 30 miles from South Dakota and have seriously thought of moving there for numerous reasons. The fact South Dakota doesn't have any Estate/Inheritance tax is one of them. The problem is that I own real estate in MN that would still be subject to their Estate/Inheritance tax even if I'm not a resident.

 

[RetMD21]

SD has major tax advantages.

Generally speaking the key with an ILIT is the death benefit AND the ownership are not in your name. That is why it is not taxed in your estate at death. Another option is just doing a "change of ownership" to your chosen beneficiaries. Obviously, this requires death to happen in order but cheaper/easier than an ILIT. On the other hand an ILIT can be written to include creditor protection for your chosen beneficiaries which can be pretty powerful. Definitely talk to an experienced estate planning attorney. This is not an area to find a generalist attorney nor do I recommend doing it yourself. Good luck.

Would you have to file a gift tax return for the transfer and them any premiums? I'm just curious.

 

[ERD50]

Are you still paying premiums into the policy? If so, consider whether it would be better to just gift those to the heirs - no tax implications for up to $18,000 per person. This will reduce the death benefit, but it's probably a wash, the ins co has to make a profit.

But yes, as I understand it, you need to have the ownership and beneficiaries outside of your estate to avoid having that value included in the estate for estate tax.