Process Overview for Implementing a Life Insurance Irrevocable Trust

By Ron Rydell • February 20th, 2009

Going forward to implementing a life insurance irrevocable trust (ILIT) the following steps take place:

  1. Our application that both you and your wife will sign will be for underwriting purposes only to determine the rate for you both based on current and past health.
  2. The ultimate applicant will be the Irrevocable Trust that you need to create with your attorney based on the sample language that I gave you.
  3. You should have two trustees: a) a corporate trustee (like, your CPA or your attorney) and one of your children that you pick.
  4. The will sign the subsequent application as owner of the policy titled the “Irrevocable Life Insurance Trust of Client and his wife”
  5. The beneficiary of the trust will also be the trust with the trustee’s administrating the trust.
  6. Payment of the premium, annually, comes from gifting the premium to the ultimate beneficiaries of the trust, like children and grandchildren and for 2009 the amount is $13,000 for each spouse ($26,000 jointly) for EACH child and/or grandchild. Example: two children and four grandchildren equal a total gifting of the annual exclusion of $156,000 per year. The Crummy rules specifically state that the recipients of the annual exclusion gift are NOT REQUIRED to donate the gift to the trust but an “understanding” should be in place that they do this, so the trust then has the money to pay the annual premium.
  7. The proceeds of the insurance policy, upon the second death, will be paid directly to the trust and will be out of your taxable estate.
  8. Your trustee’s will then use the proceeds to purchase assets from the estate to be distributed to your beneficiaries. Your estate will then use the cash left in your estate to pay the tax and the estate will get a deduction for the amount paid to the IRS.
  9. If one spouse is NOT a grantor for the exclusion, the cash values can be accessed by the other spouse as a loan if cash is needed while living. The loan will accumulate with interest and be subtracted from the proceeds if not paid back by death.
  10. Using the proceeds of the trust your trustee’s (your son or daughter and/or your attorney or accountant) will be able to purchase assets from your estate at a discount since many of these assets will have a “lack of marketability discount” as provided by estate tax law.

I hope this letter give you an overview of our process.

To download a copy of this letter in pdf format, click here

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