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Entries in irrevocable trust (3)

Thursday
May072015

Benefits of an Irrevocable Life Insurance Trust as Security for Support

 

by Kira S. Masteller and Anthony D. Storm

 

Divorce or separation agreements often require one spouse to maintain life insurance as security for their support obligation. Attorneys often do not address the tax implications if the insured spouse owns the policy. 

Often life insurance will create an estate tax that would NOT otherwise exist by adding a windfall to the insured’s estate upon death. The death benefit of a life insurance policy owned by the insured spouse will be included in his or her estate for estate tax purposes. When the insured owns his or her life insurance policy, he or she has “incidents of ownership”, such as withdrawing cash value, assigning the cash value as collateral, or changing the beneficiary during his or her lifetime. 

In order to keep the death benefit OUT of the insured’s estate for estate tax purposes, the insured can create an Irrevocable Life Insurance Trust, commonly referred to as an ILIT.

Once created, the Trustee of the ILIT will own the life insurance policy, NOT the insured. As a result of having the ILIT own the policy, the insured avoids incidents of ownership and the tax implications associated therewith. 

The ILIT will also be the beneficiary of the life insurance policy resulting with the death benefit being held for the ex-spouse, children or other beneficiaries until certain ages, and can provide liquidity to an insured’s taxable estate, without having the death benefit itself be exposed to estate tax.  

Should the insured pass away before a support obligation is complete, the death benefit related to the support for the benefit of the ex-spouse would be administered by the Trustee of the ILIT pursuant to the terms of the Marital Settlement Agreement/Judgment. The residue of the death benefit, if any, would pass to the other named beneficiaries via the ILIT with no Court proceeding. 

Kira S. Masteller is a Trusts & Estate Planning Attorney. Contact her via email: kmasteller@lewitthackman.com, or by phone: 818.907.3244.

Anthony D. Storm is a Family Law Attorney. He can be reached via email: astorm@lewitthackman.com, or by phone: 818.907.3248.

 

Disclaimer:
This Blog/Web Site is made available by the lawyer or law firm publisher for educational purposes only, to provide general information and a general understanding of the law, not to provide specific legal advice. By using this blog site you understand there is no attorney client relationship between you and the Blog/Web Site publisher. The Blog/Web Site should not be used as a substitute for obtaining legal advice from a licensed professional attorney in your state.

Monday
Jul082013

Tony Soprano's Run In With the Tax Man

 

by Robert A. Hull

 

Many of us who were fans of the HBO show about a fictional New Jersey mafia family, The Sopranos, and actor James Gandolfini in particular (who played mob boss Tony Soprano), were shocked and saddened to learn of the actor's untimely death.  

Now, the media reports that substantial taxes will be due on Mr. Gandolfini's estate due to poor estate planning. Could some of these taxes have been avoided or, at the very least, delayed with different estate planning strategies?  

Based on the latest information about his estate, it is very likely. While many of the specifics are unclear, it appears Mr. Gandolfini could have benefitted from using estate planning strategies to leave more of his assets to his family.

As one example, if the $7 million life insurance payout to James' son was not held in a life insurance trust, the full value of this payout would be included in the value of his estate for taxation purposes. If such insurance were held in a life insurance trust, then this payout would not be included in his taxable estate, and could result in savings of several millions of dollars in estate tax.

Also, Mr. Gandolfini could have potentially reduced the size of his estate subject to estate taxes also by using revocable and irrevocable trusts, perhaps creating certain business entities and employing gifting strategies. But, without additional specific information about his assets, it is difficult to tell which combination would have been most effective.

Though the value of most of our estates does not approach Mr. Gandolfini's, estimated at over $70 million, we all have an interest in maximizing the assets which are ultimately distributed to our beneficiaries and minimizing those to the Tax Man.

The government's take from Mr. Gandolfini's estate will likely be over $30 million, and that's a lotta "scharole".

Disclaimer:
This Blog/Web Site is made available by the lawyer or law firm publisher for educational purposes only, to provide general information and a general understanding of the law, not to provide specific legal advice. By using this blog site you understand there is no attorney client relationship between you and the Blog/Web Site publisher. The Blog/Web Site should not be used as a substitute for obtaining legal advice from a licensed professional attorney in your state.
Wednesday
Jun052013

Using Life Insurance and Irrevocable Trusts in Estate Planning

Trusts & Estate Planning Attorney

by Kira S. Masteller
818.907.3244

 

Continuing with Part 2 of our Gift Tax and Estate Planning blog series (we discussed Living Trusts in Part 1 of the series), we now turn to life insurance – one more helpful tool in accomplishing your goals – if used in conjunction with an irrevocable life insurance trust.

Many people own life insurance so that their family will have sufficient capital to replace their income for a specific period of time. Others own life insurance to enable a business partner to buy out the family's interests in a jointly owned company upon their death. Still others have life insurance specifically to pay estate taxes. 

However, a problem arises if you own your life insurance policy. The death benefit of your life insurance will be included in your estate for estate tax purposes if you are the designated Owner. You might not have a taxable estate with your home, savings and retirement, but when you add your $1,000,000 death benefit to your estate, your tax situation changes. 

You can avoid including life insurance in your taxable estate by using an irrevocable life insurance trust. An irrevocable trust can be set up specifically to own your life insurance and receive the death benefit. 

You cannot be the Trustee of the trust, but you can appoint a trusted family member, friend, or professional Trustee who will own the life insurance on your life as Trustee, pay the premiums annually (which you will gift to the Trust each year), and who will ultimately file a claim upon your death and receive the insurance proceeds available for your family, or to pay estate tax as you plan. 

The use of a life insurance trust can determine whether or not you have a taxable estate, as well as provide liquidity to an estate that is already taxable. It is an inexpensive tool available to anyone who is going to purchase life insurance or who already has life insurance. 

There are specific Internal Revenue Code rules that must be followed with respect to a life insurance trust, but they are well worth the cost and effort when you are saving up to 40 percent in estate taxes on the life insurance proceeds. Contact me if you have any questions regarding how best to maximize your tax savings.

In the next installment of this series, I'll be blogging about Designated Beneficiary Assets, specifically, income tax, capital gains tax and estate tax.

Kira S. Masteller is a Gift Tax & Estate Planning Attorney in our Trusts and Estate Planning Practice Group. Email her at kmasteller@lewitthackman.com for more information.

Disclaimer:
This Blog/Web Site is made available by the lawyer or law firm publisher for educational purposes only, to provide general information and a general understanding of the law, not to provide specific legal advice. By using this blog site you understand there is no attorney client relationship between you and the Blog/Web Site publisher. The Blog/Web Site should not be used as a substitute for obtaining legal advice from a licensed professional attorney in your state.

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