Estate Planning Trusts
Now that Barack Obama has been elected, and the Senate and Congress have the Democrat Party firmly entrenched, it is time to turn our attention to Estate Tax Planning. This tax is lovingly referred to as "The Death Tax" in many circles. I would really be floored if the Obama administration didn't reinstate this tax, which is set to expire in 2010. Here are a few financial planning strategies to address the estate tax issue. The typical use of life insurance by an estate planner involves the purchase of a last survivor policy by an irrevocable life insurance trust (ILIT). Often ignored, however, are the benefits life insurance may provide when used in conjunction with other types of trusts customarily created under an estate plan. Two common trusts used in an estate plan are the qualified terminable interest property (QTIP) trust and the bypass trust. When utilizing the marital deduction, an estate plan may provide that property equal to the applicable exemption amount in the year of a decedent’s death pass to a separate bypass trust. The remaining portion of that deceased spouse’s estate may be transferred to a QTIP trust requiring all net income from the trust be distributed at least annually to the surviving spouse.The QTIP
The most common complaint concerning QTIP trusts is the surviving spouse’s sensitivity to restrictions and limited access to trust assets. Life insurance owned by one spouse on the life of the other spouse supplies the surviving spouse immediate cash without limitations and can be used to substantially supplement trust income, while assets are preserved inside the QTIP trust for eventual distribution to the deceased spouse’s named beneficiaries.The Bypass Trust
Assets held in a bypass trust are typically subject to income and capital gains tax and do not receive a step up in basis upon the death of the last surviving spouse.1 Life insurance may significantly leverage the transfer of wealth from the bypass trust to the trust beneficiaries in an income tax efficient manner when the surviving spouse does not need substantial income from the trust.Case Study
Frank (58) and Susan (52) Robinson have a net worth of $7 million. They have 3 children and have created an estate plan. Their attorney recommended that they create an ILIT and purchase a $3 million last survivor policy to provide funds for potential estate tax liability. After reviewing the estate plan with Frank and their attorney, Susan was uncomfortable knowing that if Frank dies fi rst, most of their property would be held in trusts. She would like to have unrestricted access to at least $1 million in cash to maintain her accustomed lifestyle. Their insurance representative recommends that Susan purchase for her benefit, a $1 million universal life insurance policy with a guaranteed death benefit on Frank’s life. Frank can transfer the annual premium amount of $14,3442 to her gift tax free during his lifetime.3 Upon Frank’s death, Susan will have unrestricted access to the death benefit proceeds, while preserving the remaining assets inside the trusts.Advanced Sales Strategies
Summary of Benefits of Life Insurance Used in Conjunction with Estate Planning Trusts • Cash can be provided to a surviving spouse without limitations or restrictions or in lieu of a beneficial interest in a trust estate • Assets in trusts creating taxable income can be replaced by the purchase of life insurance thereby providing significant income and estate tax benefits • Life insurance proceeds received outside of the estate may provide liquidity to help pay estate tax • Life insurance provides diversification, stability and flexibility when utilized within an appropriate estate planning strategy
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Death of Frank
Upon Frank’s death at age 76, Susan, then 70, receives $1 million of insurance death benefit proceeds and the assets of Frank’s estate are distributed to the appropriate trusts. The bypass trust now holds assets equal to Frank’s current applicable estate tax exemption amount and will be distributed to his designated heirs upon Susan’s death. (For this case study a hypothetical exemption amount of $3.5 million is assumed.) The trustee of the bypass trust uses a portion of trust assets to fund an universal life insurance policy on Susan’s life. The trustee pays ten annual premiums of $239,138 for a $6,000,000 guaranteed death benefit to age 121.Death of Susan
Upon Susan’s death the trustee will distribute the funds to the beneficiaries of the bypass trust. The combination of appreciated trust assets and a tax free death benefit diversifies the bypass trust estate and efficiently leverages the initial bypass trust assets of $3.5 million to an amount in excess of $7 million upon the death of Susan.Please visit our site for more Retirement, 401k, and Insurance information: www.erollover.com Featured Sponsor: Subscribe to erollover.com Blog by Email
