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Life insurance Trust

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  • Life insurance Trust

    I am getting conflicting answers about needing a life insurance trust or not for my term policy.  I have a 6M, 30 year laddered term, basically dropping off 2M every 10 years. I'm in my second policy year, so in about 8 years it drops to 4M.  My estate planner is telling me that with a trust if I die all 6M will go to my wife, but without a trust, anything above  5.45M excemption (life insurance, taxable accounts etc.) will get hit with estate tax.  When I research it though it appears that there may be an unlimited spousal exemption, but I can't nail that down.  In addition, the trust has to be in place for a couple years before it's valid or else the courts don't allow it.

    I'm only worried about my wife having to pay taxes on anything, if we both die and the kids have to pay taxes, poor them.

    Does anyone have more info on this?  I'm leaning towards not doing it since it won't kick in for a couple years and by then I'll only have 5 years left before my policy drops to 4M.

  • #2
    If YOU own the life insurance, it is probably considered part of your taxable estate.

    Your current net worth at the time of your death + your life insurance sounds like it is probably in excess of $5.45M (2016), so whatever amount is in excess of $5.45M will be subject to estate taxes.

    From my understanding, a life insurance policy must be owned by an irrevocable life insurance trust (policy premiums being paid out of trust assets) for at least 3 years before your death to be considered "out" of your taxable estate (so you can't put the policy in a life insurance trust when you are on your deathbed and expect to avoid the taxes).

    My wife and I save 50/50 in each of our names.  I carry $4M of 30 year term (2x$2M), so I figure that when we are 3 years away from our net worth being $2.9M, I should probably consider transferring at least one of my term policies to a trust to avoid the tax, since $2.9M/2 = $1.45M, and $1.45 + $4M = $5.45M would put me at the limit.

    I hope that makes sense.


    • #3
      You need to fire your estate planner.  There is an unlimited spousal exemption allowing for you to leave as much as you want with no estate taxes.  If you own the policy, it would be part of your estate but that would only impact your children, not your wife.  She will get the full death benefit in cash both income and estate tax free.

      Some people put the lifetime exemption of 5.45M payable to a trust to make sure it is never taxed, but with the portability of the exemptions this is not needed nearly as much as in the past and is again a planning tool for future generations. You have no need for a trust to own this policy based on your stated goals.

      Your planner is either trying to bilk you for fees or is ignorant of the tax code.  Both fireable offenses.


      • #4
        The only scenario I am aware of, where you would have to use the personal estate tax exemption and would not have access to the unlimited marital deduction is if you have a noncitizen spouse.

        Your spouse would need to file an estate tax return to preserve the deceased spousal unused exclusion.  If that was overlooked, it could be a costly error (for your children).

        It is strange that you are so interested in protecting your spouse from estate taxes, but you are fine giving Uncle Sam those dollars instead of your children - are you sure you have thought this one through?  If you both die, someone is going to be taking care of your children - why would you like that person to have less financial resources at their disposal than your wife when raising your children?

        There are other reasons for using a trust also, chiefly, it would protect those assets from your wife's future spouses or creditors - that is a kind of protection for those assets which would be very difficult for her to obtain in any other way.

        Your state bar probably has an estate planning section - it might be a good value proposition for you to pick someone randomly from the list, with no connection to your current "estate planner" and get a second opinion about your situation specifically.




        • #5
          Thanks everyone for the info.  I felt that it was unnecessary for my wife, but might be good for my kids.  With this info, I'm going to hold off for now.

          Phastasos, love the Abraham Lincoln quote.  Also, The reason I'm concerned about my wife's taxes, but not the kids is really just that if we both die and they are left with a few million a piece, they will survive just fine.  The insurance was more than I needed when you look at what we actually spend, not make, each year.  But it was what my wife wanted to never have to re-marry, work etc. and basically never worry about money again.  So for her peace of mind we did it.  I'm hoping to be able to drop the policy in the future as we have a large savings rate right now.

          I also am not tied to this attorney. He owed money and I needed one specific estate thing done, which he did for me and i was happy with, but then started up with this trust that i wasn't so keen on.  So, easy to move on.

          Thanks again guys, and Thanks WCI for the forum.  It helped me already!


          • #6
            Your estate planner is wrong.
            Our passion is protecting clients and others from predatory and ignorant advisors. Fox & Co CPAs, Fox & Co Wealth Mgmt. 270-247-6087