Loan to trust

[FBN2007]

What is the name of your state? MD

A person wants to buy life insurance so he loans money to an irrevocable life insurance trust so trust can buy insurance. Loan document states that upon insured's death, loan repayment is forgiven. Is this legal so that loan amount does not get included back into the person's estate?

 

[seniorjudge]

What is the name of your state? MD

A person wants to buy life insurance so he loans money to an irrevocable life insurance trust so trust can buy insurance. Loan document states that upon insured's death, loan repayment is forgiven. Is this legal so that loan amount does not get included back into the person's estate?

You have started three other threads on this subject.

Stop quadruple posting; ask your questions in your original thread.

 

[FBN2007]

Senior judge,
This is the first time I asked this question so I don't know what you are referring to but thanks for the helpful answer.

 

[LdiJ]

What is the name of your state? MD

A person wants to buy life insurance so he loans money to an irrevocable life insurance trust so trust can buy insurance. Loan document states that upon insured's death, loan repayment is forgiven. Is this legal so that loan amount does not get included back into the person's estate?

And why would he do it this way? What is the motivation? What is he trying to accomplish by such a convoluted way of buying life insurance?

 

[tranquility]

No, it is not so simple. Anything which approaches your goal is fancy law and you will need to speak with an attorney to help you through as the area is extremely technical and not entirely clear with court cases coming out against certain areas and treatments. I'd have to look through my case file, but recall an important IRS ruling fairly recently which put the kabosh on many prior cases allowing it.

The term you might want to search for is SCIN (Self cancelling installment note) to give you a better sense of what is happening. The law is changing rapidly in this area and it is definitley not a do-it-yourself project. There are (or were, I haven't done any continuing education after the recent changes) requirements to base the note on life expectancy and there was a sliding scale of risk/benefit depending on how long until the target person died. Also, there are some very sophisticated estate planning techniques which create a plan using this technique and simultaneously setting up other vehicles with a reverse sliding scale of risk/benefit to make the value of the planning very predictable.

See the guy. Not just a guy, the guy. The guy who does this all day long every day and charges a ton of money for his expertise.

 

[FBN2007]

The motivation is to remove the life insurance out of the estate but at the same time not to reduce the estate tax exemption being reduced if the payment to the trust is considered a gift.

 

[LdiJ]

The motivation is to remove the life insurance out of the estate but at the same time not to reduce the estate tax exemption being reduced if the payment to the trust is considered a gift.

Then why not just have the beneficiary be the owner of the policy? Wouldn't that eliminate the problem?

 

[tranquility]

If the amount of the policy is high enough or if the person the policy is on is old enough, the amount of the premium can be pretty high. Insure an 80 year old in ill health for $10 million to pay for estate taxes and there will be a wolliping gift tax due on the gift of the preminum to the trust. Buy a 10 year term and the trust pays for it by borrowing from the person and then, gift the note's interest due and forgive the note on death and bingo-bango the liability disappears. It's magic--I've seen it done. You've got to hope the guy dies in a certain time frame or bad things happen. Also, little tiny errors in anything and bad things happen.

 

[FBN2007]

If the debt is forgiven by the decedant's estate then wouldn't the IRS classify the debt as income to the trust and it would be taxed at the trust's tax rate? What am I missing?

 

[tranquility]

You're missing a consultation with an experienced estate attorney who will be paid hundreds to thousands of dollars just to explain the concepts and risks and rewards to you. They will probably have a prepared outline and a nice powerpoint presentation. This forum is just too limited (as is my time) to even attempt to explain complex estate-planning techniques.

As I said before, this is fancy law. It is based on a number of case law concepts with subtle inferences related to the holdings. When you stack all these things together you have the results mentioned--maybe. Any of the inferences can be attacked by the IRS and a person needs to build their fact predicate very carefully or the house of cards falls apart. There's not a three paragraph answer to your question. Sometimes things are hard, especially when someone really, really, really wants to avoid taxes.

Your only real choice is to pay the money to see the guy or start reasearching and spend the months necessary to understand this specific topic. I am not the guy. I'm the guy who directs clients in certain fact situations to see the guy.

 

[abezon]

The motivation is to remove the life insurance out of the estate but at the same time not to reduce the estate tax exemption being reduced if the payment to the trust is considered a gift.

Gift the money to the beneficiary so s/he can take out the policy. As long as the annual gift is under $12,000, no gift tax return is required. Find a policy that lets the beneficiary/policy owner pay the premium over a number of years.

If the policy premium is so big that this is not practical, then pony up the money for THE guy's expert advice & stop being cheap. Seriously. This is only an issue if the policy will cost over $12,000 per year AND your eventual estate will exceed $2M. If that's the case, then you can afford to hire someone to do this right. BTW, the insurance company rep is not THE guy; he's the fellow who lives on commission & will tell you whatever you need to hear to get you to sign the check.