Transcript CASE STUDY: Irrevocable Life Insurance Trust

One of the most important steps any person
can take to ensure that:
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Your final property and health
care wishes are honored
Your loved ones are provided
for in your absence.
It is much more than just writing a will or designating a
beneficiary for life insurance.
Estate planning is an ongoing process that includes a wide range of
activities that fall into three broad categories:
Strategies to potentially BUILD your wealth and to maximize the value of
what you leave behind for your heirs.
Strategies to PROTECT your wealth, to ensure that what you’ve spent a
lifetime building isn’t eaten away by taxes, inflation, or the cost of a
catastrophic illness.
Strategies to DISTRIBUTE your wealth, so that those you love may be taken
care of and your assets and possessions go where you want them to go
– and in the time frame you want it to happen.
Regardless of their age, or the size and complexity of their estate, an
estate plan can accomplish the following:
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Identify the family members and other loved ones that you wish to
receive your property after their death.
Ensure that your property will be transferred to those you’ve identified,
as quickly and with as few legal hurdles as possible.
Minimize the amount of taxes that will need to be paid in order for your
property to pass to others after your death.
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Proper planning may reduce delays in settling your estate
and speed distribution of your assets to your heirs.
Dictate the kinds of life-prolonging medical care you wish to
receive should you be unable to make your wishes known
when the time comes.
Set forth the kind of funeral arrangements you would like,
and how related expenses are to be paid.
The costs of estate settlement – including fees for lawyers,
appraisers, accountants, and court proceedings – are paid
from the value of your assets. Careful planning can help
minimize those costs.
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Wealth Management:
“Can I do better with my assets?”
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Wealth Preservation:
“Can I leave more to my family
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Baby Boomers are receiving inheritances from their aging parents
Those who don’t have immediate income needs want to set up
strategies to transfer their own wealth to the next generation
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As a result, the amount of money held in trusts will continue to increase
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Currently, there are nearly $3 trillion in trust-held assets¹
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By 2010, some estimate this number could DOUBLE
¹Source: www.financial-planning.com, 8/11/06
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Puts conditions on how and when your assets are distributed
after you die
Reduces estate and gift taxes
Distributes assets to heirs efficiently without the cost, delay, and
publicity of probate court (probate can cost between 5% to 7% of
your estate)
Better protects your assets from creditors and lawsuits
Names a successor trustee, who not only manages your trust
after you die, but is empowered to manage the trust assets if you
becomes unable to do so.
1.
Grantor – the creator of the trust.
2.
Trustee – the person or entity that distributes and
manages the trust property according to the trust
documents.
3.
Trust Assets – property transferred into the trust.
4.
Beneficiaries – those who receive the benefits of
the trust.
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Irrevocable trust – a trust that can’t be modified or
terminated with the permission of the Beneficiary.
The Grantor, having transferred assets into the
trust, effectively removes all of his or her rights of
ownership to the assets and the trust.
Revocable trust – a trust that allows the Grantor to
modify the trust.
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May be altered or terminated during the Grantor’s
lifetime.
Since the trust may be altered at any time until the
Grantor’s death, it is considered part of the
Grantor’s estate and is subject to taxation.
The trust property is passed on to the
Beneficiaries only after the Grantor’s death, and
the revocable trust then becomes irrevocable.
The Marital Trust
(sometimes referred to as the “A” trust)
The Credit Shelter Trust
(sometimes referred to as the “B” trust)
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Takes advantage of the Unlimited Marital
Deduction, meaning one spouse can generally give
unlimited amounts to the other spouse without
creating an estate tax.
The Marital Trust generally provides the surviving
spouse with total access to all the trust income
and principal.
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Utilizes each spouse’s Unified Credit.
The Unified Credit permits a certain amount of an
estate to pass (to anyone) without estate taxes
(this is also referred to as the Estate Tax
Exemption).
Generally provides the surviving spouse with as
much income as needed with the balance invested
to eventually pass to the next generation.
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Every trust has a Trustee who has the authority to
invest the trust assets in a variety of investments,
depending on the particular goals of the trust.
If the trust is designed to provide immediate
income to the trust Beneficiaries, such as a Marital
Trust, investments that can produce a steady
stream of income are favored.
If structured properly, a trust funded with Life
Insurance:
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Provides immediate cash to pay estate taxes and
other expenses after death.
Reduces estate taxes by removing insurance from
your estate.
Inexpensive way to pay estate taxes.
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Proceeds avoid probate and are free from income
and estate taxes.
Gives you maximum control over insurance policy
and how proceeds are used.
Can provide income to spouse without insurance
proceeds being included in spouse’s estate.
Prevents court from controlling insurance proceeds
if Beneficiary is incapacitated.
An Irrevocable Life Insurance Trust lets you:
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Reduce or even eliminate estate taxes so more of
your estate can go to your loved ones.
Gives you more control over your insurance policies
and the money that is paid from them.
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Estate taxes are different from (and in addition to)
probate expenses and final income taxes (which
must be paid on any income you receive in the year
you die)
Some states have their own death/inheritance tax;
you could be exempt from the federal tax and still
have to pay a state tax
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Federal taxes are expensive – the rate is 45%
Federal taxes must be paid in cash, usually within
nine months after death.
Few estates have this kind of cash and assets
often have to be liquidated
But estate taxes can be substantially reduced or even
eliminated – IF you plan ahead!
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The ILIT owns your insurance policies for you.
Since you don’t personally own the insurance or
have any “incidents of ownership,” it will NOT be
included in your estate – so your estate taxes are
reduced.
An insurance trust has three Components:
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The Grantor is the person who creates the trust.
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The Trustee is the person selected to manage the
trust.
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The trust Beneficiaries, who will receive the trust
assets upon death of the Grantor.
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The Trustee purchases an insurance policy, with the
Grantor as the insured and the Trust as Owner (and
usually Beneficiary) of the policy.
When the insurance benefit is paid after death of the
Grantor, the Trustee will collect the funds, make them
available to pay estate taxes and/or other expenses
(including debts, legal fees, probate costs, and income
taxes that may be due on IRAs and other retirement
benefits).
The Trustee then distributes the funds to the trust
Beneficiaries as instructed by the Grantor.
The Holmes Family
Married
Combined Net Estate
$5 Million
$1 Million of Estate is
Life Insurance
Joseph & Jan Holmes
are married,
with a combined net
estate of $5 million –
$1 million of
which is
life insurance.
They can protect up to $4 million from estate taxes with a tax planning provision in a revocable
living trust or will. But their estate would have to pay $450,000 in estate taxes on the additional
$1 million. With an ILIT, the $1 million in insurance would NOT be in their estate and this would save
their family $450,000 in estate taxes.
Cost of Estate Taxes for $5 Million Estate¹
Option 1:
Leave everything to Spouse
(No Planning)
27% to Estate taxes
$1,350,000
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Option 2:
Living Trust with
Tax Planning
9% to Estate taxes
$450,000
Option 3:
Living Trust and
Insurance Trust
2.4% to Estate Taxes
$118,328
¹Hypothetical example for $5 million estate to pay taxes in 2007 & 2008,
depending on the tax-planning options used.
Option 1:
Leave everything to Spouse
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(No Planning)
27% to Estate taxes
$1,350,000
Option 2:
Living Trust with
Tax Planning
9% to Estate taxes
$450,000
Option 3:
Living Trust and
Insurance Trust
2.4% to Estate Taxes
$118,328
1) If your spouse is a US citizen, you can leave him or her an unlimited amount when
you die with NO estate tax. But when your spouse dies, the full estate will be taxed.
$1,350,000 of the $5 million estate (27%) would be consumed by estate taxes.
2) A tax-planning provision in a revocable living trust* will protect $4 million from estate
taxes, but $450,000 (9% of the estate) would still be owed in estate taxes.
3) Combining the tax-planning in a revocable living trust* with an insurance trust
reduces the cost of paying the $450,000 in estate taxes to just $118, 328* - 2.4%
of the estate’s value. That’s an estimate of how much it costs to purchase
$450,000 in life insurance. That’s an almost four to one ratio; every dollar spent on
insurance premium pays $3.89 in estate taxes.
*The same tax planning can be done in a will, but you do NOT avoid probate.
**Estimated costs for a male age 65 and a female age 63, using rates believed to be representative of those available from
various life insurance companies offering second-to-die policies. Actual costs will vary.
 Annuities
 Life Insurance
 Long Term Care Insurance
 Disability Income Insurance
Your Estate Plan should include these four insurance products
in order to be considered “Comprehensive.”
Bradford R.Yeater, GEPC
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Graduate Estate Planning Consultant
Fortune 500 Management Experience,
E.F. Hutton & Co.
Bradford R. Yeater. GEPC
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27 Years Planning Experience**
Number One Ranked Broker Dealer,
LPL Financial Services*
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Corporate Trustee Services thru,
Private Trust Company
Chairman’s Advisory Council,
PimCo, Inc.
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Former Board of Directors, Mainly Mozart
Former Board of Directors, SDHDF
*Financial Planning Magazine
** California Insurance License 0746398