Ch 3 - Irrevocable Life Insurance Trusts Flashcards Preview

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Flashcards in Ch 3 - Irrevocable Life Insurance Trusts Deck (14):

Avoids /minimizes gift, estate, and GST taxes

Maximizes annual exclusion giving

Provides liquidity for the estate

Avoids probate

Provides for distribution by grantor's terms

What are the 5 benefits of an ILIT?


Wealthy grantors need all the exemptions exclusions and credits

Annual exclusion is 14k

Applicable credit is the remaining 5,250,000

How are ILIT Gift Taxes handled aka minimized?


Applies to all non marital gifts in a tax year

Requires consent on tax return 709

Unavailable after spouse dies

What is gift splitting with a spouse?


*Beneficiary given temporary right to withdraw a pro rata share of the gift up to the annual exclusion amount

*the crumney trust & the notice requirement

*IRS position: adult beneficiaries must receive notice, beneficiaries cannot waive right to notice, minors can probably be ignored

What is the present interest requirement for the annual exclusion


*Must create & fund ILIT by trustee applying for policy & placing funds in cash equivalents

*mail notices for at least 15 day power

*crummey rights lapse

trustee pays premium

What audit proof do you need for a crumney trust?


Donor has 14k annual tax exclusion

Beneficiary make taxable gifts if they lapse a crummey power in excess of the greater of 5000 or 5% of the principal

What problems can arise when there is a large premium


Stack beneficiaries

Cristofani case

Keep lapse non taxable

Limited retained powers

Hanging powers

Permanent powers

How can you succeed with large premiums


Submit unpaid application or memo

Determine insurability

Create ILIT trustee applies & pays for policy

How is the insurability process handled


Gives trustee power to buy estate assets

Gives trustee power to loan cash to executor

Makes sure will gives executor matching power

How does an ILIT provide estate liquidity but not estate taxes


Trustee distribution power

Super trust power

Trust protectors

Court authorized amendment

Grantor or new ILIT purchases policy

Spousal benefit extinguished by divorce

How can the ILIT be revoked


Many commercial trust companies are wary of ILIT assist trustee with due diligence

Provide regular inforce illustration checkup

Remember that variable policies add to trusts risk

What the the fiduciary concerns


Provide ILIT for grandchildren

Effective use of GST exemption 5.25 m in 2013

States have begun to eliminate rule against perpetuity es Normal gift & estate tax issues still apply (crummey powers for gift tax)

Allocation of GST exemption on gift tax return

  • - crummey powers don't work bc GST annual exclusion is defined differently to be restricted to direct skips trusts

What is the purpose of dynasty trusts


Manage 1st death needs

Premiums after 1st death must be managed

What must you think of with survivorship & ILITS


Funds should not be left outright if conservatorship is anticipated

Funds could be left to other heirs who might be morally bound to provide assistance

Funds could be left in a discretionary ILIT with no support requirement and other heirs are vested remainder persons

What are the planing steps for life insurance for special needs heirs