Magazine article The CPA Journal

Creation of Life Insurance Trusts

Magazine article The CPA Journal

Creation of Life Insurance Trusts

Article excerpt

Irrevocable Transfer. An individual must relinquish all present and future ownership interests in the insurance policy in order for the proceeds to be excluded from the estate. Thus, the transfer to the trust must be irrevocable and the insured must not retain any incidents of ownership in the policy. The following are examples of "incidents of ownership":

The right to change the beneficiary,

The right to revoke an assignment,

The right to pledge the policy for a loan or obtain a loan from the insurance company based on the policy's cash surrender value, and

The retention of a reversionary interest in excess of five percent of the value of the policy immediately prior to death.

If the decedent possesses any of these "incidents of ownership" at the time of death, the proceeds of the insurance policy will be included in the estate, even if it is payable to an irrevocable trust.

A Funded or Unfunded Trust If a taxpayer transfers a policy that is not fully paid for to a life insurance trust, a decision has to be made as to whether the insured will continue to pay the premiums or whether to fund the trust so that it can make such payments directly. If the insured continues to pay the premiums, each payment will constitute a taxable gift. If the trust is to pay the premiums, the insured will have to transfer enough property, in addition to the insurance policy, to the trust so as to generate the funds needed to meet premium costs. This additional property transfer is also subject to gift tax. Many individuals are reluctant to give up enough principal to generate the required income and therefore prefer an unfunded trust.

Distributions to Surviving Spouse The surviving spouse's entitlement to income from the insurance trust during her life will not cause the principal of the trust to be included in her estate. In addition, if the surviving spouse will have sufficient funds available from other sources, the trustee can be given the right to accumulate income and make discretionary distributions to the spouse or other designated beneficiaries based on need. This "sprinkling" of income can result in income tax savings by shifting income to beneficiaries in lower income tax brackets. It can also achieve additional estate tax savings by avoiding unnecessary increases in the surviving spouse's estate. …

Search by... Author
Show... All Results Primary Sources Peer-reviewed


An unknown error has occurred. Please click the button below to reload the page. If the problem persists, please try again in a little while.