life insurance trust/ownership/beneficiary to keep proceeds out of estate

[Kiawah]

I'm absolutely a proponent of them living within their means as their normal annual living expenses. But things like a wedding, or downpayment on a house, or additional college expenses, or a critical medical situation are some examples where the trustee can disburse some funds.

Structurally for my irrevocable trusts, I set up each kid with their own, so annual gifting in is clean, and I don't have one kid consuming resources unfairly impacting another. I also try to keep the asset investment mix equivalent with the same quantity and types of investments, so they perform equivalently over time.

Getting the asset growth over in the trusts over the years, as opposed to my estate, has helped tremendously in reducing my ultimate estate taxation. My goal is to be penniless when I go casters up, and/or ready for the nursing home.

 

[TrustUser]

good thoughts.

at this point, my living trust would simply become irrevocable, and the assets would then be shared by all the beneficiaries.

shared in the sense of income/use - they still remain in trust.

but i am far below the 3.5 million mark.

if i get closer to the situation where my wealth could be subject to estate tax, i will need to do some more thinking.

and perhaps getting some ideas from ya - LOL.

i retired early, and have no kids, as of yet. but many aspects of life are still options for me, so i dont know how things will turn out.

once i start to see a need for something, i look into it.

 

[george2010]

also try to keep the asset investment mix equivalent with the same quantity and types of investments, so they perform equivalently over time.

way off topic, but your post prompted me to think about a dubious choice I made as a parent few years ago when I decided it would be fun for the kids if they owned some actual stock... not big dollar values, and not intended really as a long term investment plan, but I just thought owning a few shares of some companies they care about at an early age might be a good learning experience for them. So I put some money into UTMA discount brokerage accounts, and let them each pick a few stocks. One kid bought Apple, Google, and Nike. He's up something like 300% and thinks the stock market is really great, and that he is a brilliant investor. A second child bought Starbucks, Jamba Juice, and Coach. She's down about 20% and gets mad every time she hears about how much better brother's choices have worked out, and I think she secretly thinks that I somehow gave him some kind of inside info that led to his superior picks, because obviously I like him better! I've often looked back and wished I had instead put exactly the same stocks in each of their accounts so that they would have "learned" the same lessons. Oh well, trials of parenthood.

 

[Kiawah]

That was just a tip on the side a lawyer gave me, when creating the 2nd trust when the 2nd child was born. Unfortunately, since I fund initially the trusts with stock transfer gifts, and I had already funded the first, it wasn't easy to initially fund them exactly the same. Ten, twenty, thirty years down the road however, it matters. Seemed like such a simple concept, but had not thought of the need for it at the time.

So each years gifting, gets them closer and closer as I balance out the stocks....and at some point I'll do a mid-trust equalization if it appears necessary or can't balance everything out in other ways.

Shifting gears....the thing with custodial accounts is they go over to the kids when they turn their legal age in your state, so I limit how much is in those. A trust can last much much longer.

 

[sam02135]

you've got the idea. I'll own policy on my wife, which will pay to a testamentary trust created by my wife's will for the benefit of the kids. If for some reason, my wife were to change her will to remove the provision for the testamentary trust, then the insurance proceeds would revert back to me, which just puts me back where I started, with the proceeds of the life insurance coming to me and being subject to estate taxes when I die. And if my wife changes the beneficiary of the policy on me to her secret lover, well, I'll be dead when he gets the money so I hope they have fun together.

Funny ...

But, it the IRS regards this as an intentional way to circumvent estate taxes, they may rule against you. Know what I mean?

Just make sure the language is clear that lawyers cannot twist the words around and say the real intentions were.. blah blah blah. Remember $1M max as a gift free of any gift taxes, I think it's $13K/year without having to file any records of a gift. Best thing to do .. is .. ahem .. "spend it for yourself"... ahem and who knows .. you may change your mind and stick it somewhere... Did someone say Switzerland? .. Not good anymore...

But as the insurance/estate taxes go, get the numbers... but "ownership of the policy" determines if it's part of the estate. Like insuring someone else and naming yourself as a beneficiary. "... I'm the owner and I'm the beneficiary...".

Check with your Estate/Tax lawyer... They're more up to date.

Doesn't this pisses you off that even after passing on in life, they want to tax what they've already taxed? This is one issue I am so pissed at. It's double dipping...

 

[sam02135]

hi george,

my knowledge about life insurance is somewhat limited, because as an "investment", it stinks.

i know that with term insurance, "someone" is insured. if said "someone" dies, then the death benefit goes to the "named beneficiary".

when you say that you own her policy and she owns yours - that is a bit confusing to me.

are you taking out a policy in case she dies ? and that makes you the owner, she the insured, and whomever as the beneficiary ?

and then vice versa - she is taking out a policy in case you die ?

Yep... you're basically taking insurance out on someone else and you're he owner of the policy and beneficiary at the same time. It's there in the forms.

 

[sam02135]

way off topic, but your post prompted me to think about a dubious choice I made as a parent few years ago when I decided it would be fun for the kids if they owned some actual stock... not big dollar values, and not intended really as a long term investment plan, but I just thought owning a few shares of some companies they care about at an early age might be a good learning experience for them. So I put some money into UTMA discount brokerage accounts, and let them each pick a few stocks. One kid bought Apple, Google, and Nike. He's up something like 300% and thinks the stock market is really great, and that he is a brilliant investor. A second child bought Starbucks, Jamba Juice, and Coach. She's down about 20% and gets mad every time she hears about how much better brother's choices have worked out, and I think she secretly thinks that I somehow gave him some kind of inside info that led to his superior picks, because obviously I like him better! I've often looked back and wished I had instead put exactly the same stocks in each of their accounts so that they would have "learned" the same lessons. Oh well, trials of parenthood.

That's funny ... your daughter doesn't want to talk to you any more unless you give her better stock tips...

I'm personally going through defense of an estate where the Plaintiff is claiming the Plaintiff's husband intended to have his life insurance policies in the estate and for them. But her husband/my brother intended the life insurance policies to go to me... and bought the policies before their marriage. And they are claiming first the proceeds should be in a Constructive Trust and now morphed into Expressed Trust. Legal Extortion.

 

[sam02135]

That was just a tip on the side a lawyer gave me, when creating the 2nd trust when the 2nd child was born. Unfortunately, since I fund initially the trusts with stock transfer gifts, and I had already funded the first, it wasn't easy to initially fund them exactly the same. Ten, twenty, thirty years down the road however, it matters. Seemed like such a simple concept, but had not thought of the need for it at the time.

So each years gifting, gets them closer and closer as I balance out the stocks....and at some point I'll do a mid-trust equalization if it appears necessary or can't balance everything out in other ways.

The thing with custodial accounts is they go over to the kids when they turn their legal age in your state, so I limit how much is in those. A trust can last much much longer.

A 2503 C "Well being trust" is at the age of 21... I messed that one up by requesting the dates to be 35 years old for the kid to claim everything. But outside of the 2503C, you can put any age stipulations...

 

[george2010]

I finally got a definitive answer from my lawyer on this subject, and as I suspected my idea was too good to be true. The piece I was missing was about gift taxes. My plan would have been effective in moving the life insurance proceeds out of both estates, but it would have triggered gift tax on the surviving spouse, because the payment of the proceeds of the life insurance policy to someone other than the policy owner is deemed a gift from the policy owner to the beneficiary. See "B. Tax Traps Related to the Beneficiary Designation" LIFE INSURANCE TAX TRAPS

That is probably a worse outcome than doing nothing. So while there are some benefits to having the surviving spouse be the owner and beneficiary of the policy (because it won't be entangled in any way with the estate of the first-to-die spouse), it appears the only way to keep the proceeds from being subjected to transfer taxes (either estate or gift) is with an ILIT.

To give credit where due, Tecate had asked whether gift taxes were an issue, but until now I hadn't found any supporting info.