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The Case for Wealth Transfer Planning Using Life Insurance
During a wealth transfer, you can take assets that your won’t need in your lifetime and position them for an efficient transfer to the next generation. An effective strategy transfers the wealth to heirs in a financially sound — and, in some cases, tax-advantaged — manner.
Even though there is no estate tax in 2010, the current law is scheduled to expire at the end of this year, bringing back pre-2001 estate tax rates as high as 55 percent. Income taxes and other transfer costs may further erode asset values at death. To plan beyond 2010, then, you may want to look at any number of tried-and-true wealth transfer techniques using life insurance. Here are a few.
Leveraging gifts of life insurance premium
Gifts to an irrevocable life insurance trust (ILIT) can both reduce the size of the grantor’s estate and increase the amount of wealth passing to heirs via the life insurance death benefit, which may significantly exceed the total amount of gifts.
An ILIT is an irrevocable trust designed to hold a life insurance policy. Its irrevocable nature prevents the policy proceeds from inclusion in the insured’s estate. Premium gifts made to an ILIT may qualify for the annual gift-tax exclusion ($13,000 in 2010), so there would be no adverse gift tax consequences if the premium and other gifts do not exceed that amount. For the premium to be considered a gift, the trust must contain terms known as "Crummey powers."
Survivorship access trust
A survivorship access trust is an ILIT for married couples; it is designed to keep second-to-die life insurance proceeds outside the estate of both insureds while still allowing one spouse to indirectly access the life insurance account value through an independent, third-party trustee. In this arrangement, one insured (the grantor) makes annual exclusion gifts to the trust. The trustee uses the gifts to purchase a second-to die life insurance policy, and may make support payments to the non-grantor spouse through policy loans and withdrawals.
Charitable remainder trust
With a charitable remainder trust (CRT), clients can benefit both themselves and a charity. The grantor owns an annuity for a set term not to exceed 20 years, or for the rest of their life. At the end of the term or when the grantor dies, the CRT balance goes to the charity.
People often give appreciated assets to CRTs since they can take an income tax deduction on the contribution based on its full value. Once the asset transfers to the CRT, the trustee can sell it. The CRT is intended to be a tax-exempt entity, with no income tax due on the sale.
CRT income is subject to special tax treatment. Trust income is distributed first, followed by capital gain, tax-exempt income, and return of capital (i.e., basis).
CRTs are often used in concert with life insurance in an ILIT. Since the charity will receive the balance of the trust assets, life insurance in an ILIT is used to "replace" the lost asset for the family.
Asset repositioning
Asset repositioning may be suitable for such tax-deferred assets as qualified plan balances, IRAs, and non-qualified tax-deferred assets the client doesn’t need while alive. These assets could be subject to an estate tax at death and an income tax on withdrawal; combined, these taxes can reduce the value of the assets by up to 65 percent or more. Life insurance, then, may be an ideal financial instrument to reposition assets since the death benefit is generally received free of federal income taxes. If a properly structured ILIT holds the policy, the proceeds may be received estate tax-free, as well.
The client takes systematic withdrawals from the asset, pays applicable income tax, and gifts the after-tax proceeds to an ILIT, which purchases life insurance on the client. Upon their death, the benefit is paid to the ILIT income and estate tax-free.
The Hartford
It is IMPORTANT TO UNDERSTAND that the information and illustrations provided is for discusion sake only and is subject to changing legislation. It is incomplete and specific current details will need to be provided and drafted by a competent attorney.
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©2012 Hurwitz Associates, Inc. All rights reserved.
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Hurwitz Investments, located in Houston, Texas, is focused on helping clients meet lifelong financial needs - financial planning. We do life needs analysis, advise our clients about money or wealth management and investment and retirement income. We determine the portfolio allocation with Equities, Taxable and Tax Free Bonds, perhaps Real Estate, Commodities including Gold, and specifically recommend Global diversification. We invite you for a consultation to determine if your financial objectives can be met with your current asset allocation while sustaining your cash flow requirements.
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