Meurer Law Offices, P.C., serves clients in Denver, Greenwood Village, Centennial, Aurora, Littleton, Englewood, Arvada, Westminster, Broomfield, Parker, Castle Rock, Lone Tree, Sheridan, Elizabeth, Kiowa, Lakewood, Parker, Highlands Ranch, Denver County, Arapahoe County, Adams County, Douglas County, Jefferson County, Colorado.
PRACTICE AREAS - ESTATE PLANNING
Estate Planning Services
F.A.Q.'s Regarding Irrrevocable Life Insurance Trusts
Q: How does an ILIT work?
A: First, you as the Grantor create a Trust. Second, you select a Trustee to manage the Trust. Third, you name the Trust Beneficiaries who will receive the assets after you die. The Trustee purchases an insurance policy with you as the insured and the Trust as the owner. The Trust is also usually the beneficiary. When the insurance benefit is paid after your death, the Trustee collects the funds, pays your Estate taxes and other expenses, and then distributes the remaining funds to the Trust Beneficiaries as you instructed.
Q. Why not just name a third person as the owner of the policy?
You may trust this person now, but you could have problems later. In addition, if the third party owns the policy and has creditor problems, the cash value of the policy could even be garnished to help satisfy the other person’s creditors. An Insurance Trust is safer. It lets you reduce the Estate taxes and keep control.
Q: How does and Insurance Policy Trust give me control?
A: With an Insurance Trust, the Trust owns the policy. the Trustee selected must follow the instructions you put in your Trust. If your Insurance Trust is also the beneficiary of the policies, you will have even more control over the proceeds.
For example, your Trust could allow the Trustee to use the proceeds to make a loan or to purchase assets from your Estate or Revocable Living Trust, providing cash to pay taxes and expenses. You could provide your spouse lifetime income and keep the proceeds out of both of your Estates. You could keep the money in the Trust for years and have the Trustee make distributions as needed to Trust beneficiaries, which could include your children and grandchildren. The proceeds that remain in the Trust can be protected from courts, creditors (even ex-spouses), and irresponsible spending.
By contrast if your spouse or children are beneficiaries of the policy, you will have no control over how the money is spent. If your spouse is beneficiary and you die first, all of the proceeds will be in your spouse’s taxable Estate. This could create a tax problem. Also, your spouse (not you) will decide who will inherit any remaining money after he or she dies.
Q: Are there other benefits to naming the Trust as Beneficiary of an Insurance Policy?
A: Yes, if you name an individual as beneficiary of your insurance policy and they are incapacitated when you die, the court will probably take control of the money. Most insurance companies will not knowingly pay to an incompetent or incapacitated person and will usually insist on court supervision. If your Trust is Beneficiary of the policy the Trustee can use the proceeds to provide for your beneficiary without court interference.
Q: Who can be Beneficiaries of the Trust?
A: You can name any person or organization that you wish. Most people name their spouse, children, and or grandchildren.
Q: Where does the Trustee get the money to purchase the new Insurance Policy?
A: From you, but in a defined manner. If you transfer money directly to the Trustee, there could be a gift tax. But if you make annual tax free gifts up to $13,000 ($26,000 if your spouse joins you) to each beneficiary of your Trust, there are no gift tax consequences. Those amounts may increase periodically for inflation. If you give more than this, the excess is applied to your Federal Gift/Estate tax exemption. However, instead of making a gift directly to a beneficiary, you give it to the Trustee. The Trustee than notifies each Beneficiary that a gift has been received on his or her behalf and unless he or she elects to receive the gift now, the Trustee will invest the funds by paying the premium on the insurance policy. Each beneficiary must understand the consequences of taking the gift now; for example, it may reduce the Trustee’s ability to pay premiums.
Q: Are there any restrictions on transferring my existing policies to an Insurance Trust?
A: Yes. If you die within three years of the date of transfer it will be considered invalid by the IRS and the insurance will be included in your taxable Estate. There may also be a gift tax. You are better off buying a new policy.
Q: Can I make any changes to the Trust?
A: No, an Insurance Trust is irrevocable so you can’t make changes after it has been set up. It is important to read your Trust document carefully and be certain it is exactly what you want before you sign.
Q: When should I set up an Insurance Trust?
A: You can set up an Insurance Trust at any time, but the Trust is irrevocable. Many people wait until they are in their 50’s or 60’s. By then family relationships have usually settled and you know whom you want to include as a Beneficiary. You do not want to wait too long to set up the Trust as you could become uninsurable. If you transfer existing policies to the Trust you must live three years after the transfer for it to be valid.
Meurer Law Offices
5347 S. Valentia Way, Suite 220
Greenwood Village, Co. 80111
303.991.3544
Estate Planning Attorney
FREE Consultations
More Strategies
MEURER LAW OFFICES, P.C.
5347 South Valentia Way, Suite 220
Greenwood Village, CO 80111
Phone: 303-991-3544
