Life Insurance Trusts

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Irrevocable Life Insurance Trusts

trust One of several types of supplemental estate planning documents, an irrevocable life insurance trust (also called an "ILIT") can allow one to remove insurance proceeds from one's estate so long as the grantor (the person who sets up the trust, typically the insured) does not possess any "incidents of ownership" over the policy. ILITs avoid the probate process. You should carefully read and understand the trust document itself. 

Titling the Life Insurance Policy in the Name of the Trust

When a life insurance trust is established the grantor either 1) already owns the policy, or 2) does not yet own the policy.  In either case, the policy must be titled in the name of the trustee as the owner and beneficiary.

If the grantor owns the policy, the grantor must assign the policy to the trust.  The grantor must be very careful to make sure there are no restrictions to assignment and review the necessary requirements set forth in the policy or established by the life insurance company to affect the assignment.  Typically, the insured will be required to complete a change of beneficiary/owner form and file it with the life insurance company.  It is critical that the insured complete all the steps necessary to effect the assignment because the failure to transfer the policy may have serious estate and inheritance tax consequences.  It is also important to be aware that a gift tax return may be required if the policy is assigned.

If the grantor does not own the policy, the trustee will need to complete an insurance application and arrange for the insured to complete the necessary physical examinations.  It is extremely important that, when completing the application, the trustee, not the insured, should be named the owner and beneficiary of the policy.

Administration of the Life Insurance Trust

Once the trust is drafted and signed and the policy is correctly titled, the trustee must take over and administer the trust.  Most of the trustee's duties and responsibilities will be spelled out in the trust document.  Some duties will not.  If the trustee is a bank or a corporation, then experienced professionals will be administering the trust.  If the trustee is an individual who is not a professional fiduciary, then below are some of the steps the trustee may take (Please note that every situation is different and the following does not constitute legal advice; Please call Scholle Law at the numbers above for specific legal advice):

1.  Opening a Bank Account

The trustee may want to open a trust account with a local bank, depending in part on whether the premiums on the insurance policy held by the trust will be paid directly by the insured or the insured's employer or will be paid by means of contributions by the insured to the trust.

If the premiums are paid directly by the insured or the insured's employer and the trust has no reason to make disbursements (even for trustee's fees), then the trustee may not need to open an account until funds are added to the trust by the grantor or the proceeds of the policy become payable to the trust.

Alternatively, if the grantor will make contributions to the trust and the trustee will pay the premiums directly, if additional funds will be added to the trust, or if distributions are expected to be made from the trust, then the trustee may wish to open a trust account at a local bank.

2.  Getting an Employer Identification Number (EIN)

You will need an EIN under certain circumstances. An EIN may be obtained by completing a SS-4 form, entitled "Application for Employer Identification Number", available at your local IRS branch office or at our office.

3.  "Crummey" Withdrawal Rights and Contributions by the Grantor

In order for contributions to the trust to qualify for the annual gift tax exclusion of $13,000, the grantor must give the beneficiaries the present right to take their proportionate share of the contribution. This is called a "Crummey" Withdrawal Right.

Accordingly, whenever the grantor makes any contribution to the trust, the trustee must notify any and all beneficiaries who have "Crummey" Withdrawal Rights. A contribution may include, among other things, the contribution of a life insurance policy to the trust, the contribution of funds necessary to pay the premiums on the life insurance policy held by the trust, or the payment of the premiums on the life insurance by the grantor or the grantor's employer.

The notice must be given promptly after the contribution is made and should contain the following:

  • a description of the property transferred to the trust;
  • the corresponding rights of withdrawal for each beneficiary;
  • the period of time in which the beneficiary has a right to exercise his or her power of withdrawal.

The notification should be in writing. If the beneficiary is a minor child, the notice should be given to the child's non-grantor parent, guardian, or conservator.

It is possible to have the beneficiary waive his or her right to Crummey notices. It is best that the beneficiary sign a statement indicating that he or she is aware of the right of withdrawal and right to receive notification, indicating that he or she is waiving that right, and expressly reserving the right to require the trustee to give notification in the future on demand. If the waiver is made on behalf of a child or someone living under a legal disability, the waiver should only apply while the beneficiary is under legal majority age or under the legal disability.

If you would like to establish a life insurance trust, then Charles Scholle can help. Since 1995, he has represented Georgia individuals and families seeking legal estate tax avoidance planning. If you would like estate tax planning advice, then please contact Charles Scholle for a free consultation today. From a main office in Gwinnett County, he represents clients throughout Metro Atlanta and the state of Georgia. To learn more about your rights and your options, please contact the Law Offices of P. Charles Scholle online or call toll-free at 1-866-972-5287 or in Atlanta at 770-717-5100.