IRREVOCABLE LIFE INSURANCE TRUST

An irrevocable life insurance trust is a trust that can not be altered, amended, revoked, or terminated once created and funded. You place cash and/or other assets into the trust, life insurance is either purchased by the trustee on your life, your spouse’s life, your joint lives with right of survivorship, or existing life insurance is gifted (or in some cases sold) to the trust.

The insurance is paid by annual cash gifts that you or others make to the trust, income (or capital distributions) from assets placed into the trust, or a combination of these methods.

At your death, the insurance proceeds are paid to the trustee. If one of the goals is to provide estate liquidity, the trustee is typically empowered to use the cash to purchase assets from your estate. This provides cash for the estate to pay taxes and other expenses and helps assure the trust’s beneficiaries of your business or other assets.

In other situations, your purpose might have been to use the trust to provide income to certain heirs. The trustee would invest the insurance proceeds and then pay the income to the heirs.

The income heir might be a spouse, and the ultimate distribution might be to children. In other situations, the proceeds might be used to provide income to children and the ultimate distribution to grandchildren.

ADVANTAGES OF AN IRREVOCABLE LIFE INSURANCE TRUST

1. An irrevocable life insurance trust makes it possible to “create” wealth and save a massive amount of federal estate taxes (which range in rates from 18% to as high as 49% (2003)).

2. The GSTT (Generation-Skipping Transfer Tax), a flat 49 percent (2003) tax imposed on transfers to grandchildren and certain others, can also be avoided or minimized.

3. State death taxes, which may be surprisingly high, can be avoided through a properly arranged irrevocable life insurance trust.

4. Expenses, delays, and uncertainties associated with probate can be minimized or avoided.

5. Such a trust can generate cash to pay taxes and other death triggered expenses so your estate is not faced with a “forced sale” of its most important assets.

6. Meaningful amounts of income and capital for your surviving spouse and children can be provided through an irrevocable life insurance trust.

7. To some extent, your assets can be protected from the claims of creditors and from a surviving spouse’s rights of “dower”, “courtesy”, or “right of election” under state law.

DISADVANTAGES OF IRREVOCABLE LIFE INSURANCE TRUST

1. You can not revoke or cancel an irrevocable trust at will. Although creative counsel can build in considerable flexibility for tax purposes, “Irrevocable” means just that.

2. You lose the right to change the terms of an irrevocable trust, regardless of future events or needs.

3. The irrevocable trust document is complex (and therefore is relatively expensive to create) since it must anticipate the changing needs of beneficiaries for perhaps generations.

4. Federal gift taxes may be payable since each transfer you make to the trust is a completed gift. Some or all of your unified credit may be used.

5. You must pay ongoing administrative, accounting, and legal costs because records must be kept, income tax returns must be filed, and communication and correspondence with beneficiaries must be maintained.

COMPARISON WITH OUTRIGHT GIFTS

The advantages of an irrevocable life insurance trust as a wealth creating - wealth retaining device are obvious, especially when you compare it with outright gifts:

• Management

You can provide professional management of the proceeds by a personally selected trustee.

This may be the single most important deciding factor if your donee is financially, emotionally, or intellectually immature or does not have the time or inclination to handle large sums of money.

• Evening things out

Some people purchase life insurance through irrevocable trusts merely to even things out between those children who will receive a farm or business interest and those who will not.

Others have used it when one child received a superior education and is doing very well financially, but others are experiencing financial difficulties or shortcomings.

• Save Taxes

Perhaps the single biggest impetus for the life insurance - irrevocable trust combination is that this is the only way you can be sure of creating meaningful wealth and simultaneously passing a major part to heirs other than the IRS (or creditors). In many cases, taxation in two or more estates can be bypassed.

• Assured Control

Outright gifts of cash or other assets are not always used as intended.

The irrevocable life insurance trust combination can help assure you that the planned use of your wealth will not be bypassed.