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Revocable Life Insurance Trusts: What Is A Trust?
Revocable Life Insurance Trusts: What Is A Trust?
What is a trust?
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Tools & Techniques of Life Insurance Planning
Legal relationship that enables one party (the trustee) to hold money or other property (the trust principal or corpus) transferred to the trust by a second party (the grantor) for the benefit of one or more third parties (the beneficiaries) according to the terms and conditions of the legal document (the trust agreement) For investment, management, and administrative purposes, the trustee holds full legal title to the property in the trust The trustee or trustees must use or distribute the property and income it produces for and to the beneficiaries selected by the grantor and named in the trust
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Chapter 35
Tools & Techniques of Life Insurance Planning
Trust can hold assets placed into trust by its creator during his lifetime It could also accept additional assets at its creators death
LITPOW Life insurance trust pour-over will
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Chapter 35
Tools & Techniques of Life Insurance Planning
A revocable trust is generally irrevocable while the grantor is incompetent The policy owner reserves all of the ownership rights in the policies and will be responsible to pay all premiums
If the policy is funded with income producing assets, the trustee usually will be required to use the income from those assets to keep the policy in force
Chapter 35
Tools & Techniques of Life Insurance Planning
By transferring a policy to a revocable trust, if the grantor become incapacitated, the trustee can borrow cash value from the policy to keep it in force
Conservation
Distribution
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Chapter 35
Tools & Techniques of Life Insurance Planning
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Tools & Techniques of Life Insurance Planning
Avoidance of publicity
Terms of the trust are not public knowledge For example, where client wants to disinherit a particular family member or name a friend who is not a family member as beneficiary
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Tools & Techniques of Life Insurance Planning
Rule against perpetuities Allows the trust to continue longer than might be permitted otherwise
Elective share
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Life insurance proceeds will be immediately available for the trustees disposition Tax-free transactions
Transfer of a policy to the trust Designation of the trustee as the beneficiary Distribution of the proceeds to the trustee
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Tools & Techniques of Life Insurance Planning
Makes disposition of the policy easier when the beneficiary predeceases the insured Probate is avoided
With respect to policy held by or payable to a revocable trust that continues after the beneficiarys death
Proceeds may be insulated from the claims of the grantor's creditors and the claims of the grantors surviving spouse through an attack on the will or election against the will
Continues the privacy afforded through life insurance All of the clients assets can be poured over into a revocable living trust
trust serves as a unifying receptacle for the collection of assets
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Chapter 35
Tools & Techniques of Life Insurance Planning
Trustee commissions
May run as high a 1.5% to 2% of trust assets
Hidden obstacles
Bank refuses to allow the mortgage to be carried over to the trust Will the clients property and casualty company insure cars and homes owned by a trust?
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Chapter 35
Tools & Techniques of Life Insurance Planning
Estate taxes
Insurance proceeds paid to the trust will be includable in the insured-grantors estate for federal estate tax purposes and generation-skipping transfer tax purposes
Panacea syndrome
Not a magic pill Does not solve all problems simply by creating the trust
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Chapter 35
Tools & Techniques of Life Insurance Planning
Chapter 35
Tools & Techniques of Life Insurance Planning
Chapter 35
Tools & Techniques of Life Insurance Planning
Chapter 35
Tools & Techniques of Life Insurance Planning
Selection of a trustee Willingness to serve and at what cost Experience with trust, financial, business, accounting, and tax matters Temperament and relationship with the beneficiaries Tax effects of serving as trustee
Can trustee serve without unanticipated and adverse income, gift or estate tax consequences
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Tools & Techniques of Life Insurance Planning
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Revocable trust can save estate taxes through use as a nonmarital trust or marital trust
Allocate a portion of the estate into a credit bypass shelter trust. An amount equal to the unified credit equivalent ($2,000,000 in 2008) could pass to it without tax. The balance could pass to the surviving spouse in a manner qualifying for the marital deduction
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Chapter 35
Tools & Techniques of Life Insurance Planning
If and when the trust becomes irrevocable during the clients lifetime, the client will be deemed to have made a gift at that time
Value is based on the value at the time the client gives up dominion and control of the assets
Third party payment of premiums is a gift Gift when policy owned by other than insured is paid to third party
Potential serious and adverse tax consequences when life insurance is owned by one party on the life of another party and is payable to a third party
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Tools & Techniques of Life Insurance Planning
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Creditor implications
All states currently allow creditors access to any assets held in a trust which the client can revoke or liberally amend Creditors of an estate generally have 4 to 6 months to press their claims
No such time limit exists for creditors of a trust
Chapter 35
Tools & Techniques of Life Insurance Planning
Coordinating the revocable trust with the overall estate plan (cont'd)
Importance of a durable power of attorney
Simple and inexpensive legal document
Client gives a spouse, child, other relative, or trusted friend the legal right to act on his behalf and in his place with respect to financial matters
Durable Power given is not affected by the clients subsequent disability or incapacity
A well drafted power may negate the need to petition the court to have a guardian or conservator appointed to handle assets during the clients lifetime that have not already been placed into the revocable trust
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