existing policy on third party to ILIT?

[MrC1]

Client (age 49) owns and is beneficiary of life insurance on Dad (age 73). Death benefit on policy =$3.5MM. Atty is rec'm putting the policy into a ILIT to avoid having it be part of client's estate. In my mind, I don't think this will have the desired effect. If he retains incidents of control it would be pulled back in. What if he is a beneficiary of the ILIT?

[Bradly T.]

I agree with your conclusion, unless your client doesn't want the $3.5mm, which seems unlikely. His transfer of ownership would result in the cash value of the policy (if there is one) being treated as a gift to the new beneficiaries as he is the current owner of policy and cv. A better strategy might be to establish an ILIT for your client with a new policy on him (and spouse if 2nd to die is appropriate, i.e., only marriage, all kids from this marriage, etc. - or fund a QTIP with new policy if second marriage w/kids by first: estate planning is so damn interesting, especially when you don't have any information).


He receives 3.5mm at his dad's death (tax free) and plans for and solves his own estate tax issues for his kids, etc., with a paid up life policy on him and owned by trust using the gift tax exclusion rate for funding (rather than the Crummey annual or use the Crummey until his dad's policy pays off and THEN payup his ILIT with single premium - ok to MEC by the way). We may see a $3.5mm exclusion rate soon (x2 if married). Don't know your client's networth but seems to be overplanning by attorney and a surefired way to lose out on the large db he has purchased for himself. If current policy is issued by a top tier company, they may offer specialized consultation on life and ILIT strategies to argue with attorney.



Also, if client did establish his own ILIT with a policy on his own life inforce, he could also name that ILIT as a co-beneficiary on the policy he currently owns on his father's life so his trust is funded fully at his dad's death, for trustee to pay up ILIT policy with tax free proceeds and without your client making a reportable gift OR using up any of his lifetime gift exclusion, preserving it for other estate planning needs. Just thinking out loud.....where's John Olsen when you need him?

[Lucullus]

Not enough information. Is client married? What is value of his estate other than the 3.5 MM policy on Dad? What are his dispositive goals (including charitable intent)? What is nature of ILIT that atty wants client to gift policy to?

Above all: WHAT IS CLIENT TRYING TO ACCOMPLISH?

- John Olsen

[Neal Anderson]

It seems like your attorney is more interested in generating fees for legal work than the client. As far as I know, if your client truly is the owner and the benifciary of the policy, the proceeds would already be out of the estate. Changing ownership from you client to an ILIT may cause a taxable gift with very little in benefit.

[Lucullus]

Neal,

If A owns and is beneficiary of a policy on the life of B and A dies BEFORE B, then only the cash value of the policy is includible in A's estate. But if B dies first, the proceeds pass to A, and whatever remains of those proceeds will be includible in B's estate. In this case, B is considerably older than A, which makes the latter scenario more likely.

- John Olsen

[Rick S.]

Before jumping to conclusions, you need to ask the attorney if he has considered IRC Sec. 2042, which deals with incidents of ownership on the policy. (If any of those incidents are present, e.g., ability to change the beneficiary, then the ILIT will not prevent taxable estate inclusion).


Also, IRC 2035 deals with a special three-year rule to which life insurance, inter alia, is subject.


RKS, CPA, Master's in Taxation, et al

[Lucullus]

If A owns and is beneficiary on the life of B and A dies before B, only the cash value of the policy is includible in A's estate. Neither 2035 (in the event of A's transfer of the policy to a trust) nor 2042 would cause inclusion of policy proceeds in A's estate because, until B dies, THERE ARE NO POLICY PROCEEDS.

If B predeceases A, the policy will pay the death benefit to A. But, at that point, those proceeds will be cash. The policy will have terminated. So neither 2035 nor 2042 will be implicated.

- John Olsen

[Bob Vandy]

Might want to be careful of Transfer for Value concerns; I'm not certain (but would look closely at it).

[Lucullus]

Transfer for Value is an issue only when a policy is transferred for a valuable consideration. That usually means either that the transferee paid something to the transferor outright or that there was a loan against the policy in excess of premiums paid. If the client, in this situation, were to GIFT the policy he owns on his father to an ILIT of which he is a beneficiary, I see no TFV implications, unless there's a loan against the policy.

I would ask the attorney who is recommending this strategy to explain WHY he is recommending it? What does it do for the client THAT THE CLIENT WANTS DONE?

- John Olsen