Insurance trust

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Insurance Trust

An irrevocable trust set up by a policyholder in which he/she places his/her life insurance policy. This removes the policy from the policyholder's estate, shielding it from estate taxes. Importantly, the insurance trust must be set up at least three years prior to the death of the policyholder in order to exclude it from the estate. One might set up an insurance trust in order to set aside cash to pay estate taxes otherwise owed, or to provide for the policy's beneficiaries without concern for the tax. Normally, one sets up an insurance trust when one expects to have an estate worth more than the maximum exclusion figure. It is also called an irrevocable life insurance trust.

Insurance trust.

You set up an insurance trust to own a life insurance policy on your life. When you die, the face value of the policy is paid to the trust.

That keeps the insurance payment out of your estate, while making money available to the beneficiary of the trust to pay any estate tax that may be due, or to use for any other purpose.

If you're married, you may set up an insurance trust to buy a second-to-die policy, which pays the face value of the policy at the death of the second spouse. That allows the first to die to leave all assets to the other, postponing potential estate tax until the survivor dies. At that point, the insurance benefit is available to pay any tax that might be due.

References in periodicals archive ?
Irrevocable life insurance trusts or private split-dollar plans are two possible strategies.
Part I of this two-part article presents five methods: use of lifetime gifts, insurance trusts, dynasty trusts, qualified personal residence trusts and grantor retained annuity trusts.
As a general rule, life insurance trusts are grantor trusts.
Query: For a trust that is defective for income tax purposes (which is the case with many insurance trusts), should the taxpayer use the grantor's TIN?
Irrevocable life insurance trusts are often set up during an estate owner's lifetime, so that insurance proceeds will not be subject to estate tax.
When computing this inclusion ratio, filing a gift tax return late in order to use the valuation on the filing date (instead of the value on the date of the gift) may produce very favorable tax results when used for allocations of the GSTT exemption related to premiums gifted into generation-skipping life insurance trusts. This is because the increase in value of the policy on the filing date will presumably be less than the annual gift to cover the premium cost (because of commissions and other costs).
As life insurance trusts are perhaps the most common trusts for which allocations of the GST exemption are made, discussion of planning opportunities and the mechanics of filing a late notice of allocation with focus on these trusts.
Irrevocable life insurance trusts (ILITs) have become so popular in recent years that estate planning professionals usually turn to these vehicles when faced with the challenge of trying to insulate life insurance proceeds from the insured's taxable estate.
This ruling does not attack irrevocable life insurance trusts per se, but it certainly demonstrates that the administrative procedures that have been recognized by the courts must be followed.
This "leveraging" of the GST exemption is particularly advantageous when used with irrevocable life insurance trusts established for the benefit of skip persons, since the trust's property (i.e., an insurance policy) is expected to appreciate significantly on the death of the insured.
Many irrevocable life insurance trusts are structured with Crummey withdrawal rights, meaning the $10,000 annual gift tax exclusion will apply to transfers to the trust.
Although gifts to most trusts are susceptible, irrevocable life insurance trusts are most frequently affected.