Presenting a live 90 ‐ minute webinar with interactive Q&A Estate Planning and Life Insurance Crafting ILITs for Tax Benefits, Navigating the Transfer for Value Rule and Addressing Beneficiary Designations TUES DAY, JANUARY 17, 2012 1pm Eastern | 12pm Central | 11am Mountain | 10am Pacific Today’s faculty features: Today s faculty features: James A. S oressi, Law Office of James A. Soressi , Flushing, N.Y . Diana S .C. Zeydel, S hareholder, Greenberg Traurig , Miami, Fla. S cott K. Tippett, S pecial Counsel, Carruthers & Roth , Greensboro, N.C. The audio portion of the conference may be accessed via the telephone or by using your computer's speakers. Please refer to the instructions emailed to registrants for additional information. If you have any questions, please contact Customer Service at 1-800-926-7926 ext. 10 .
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Avoiding Pitfalls in Irrevocable Avoiding Pitfalls in Irrevocable Life Insurance Trust Planning By James A. Soressi, Esq., AEP, MSFS, MSD 5
James A. Soressi, Esq., AEP, MSFS James A. Soressi, Esq., AEP, MSFS Attorne at La Attorney at Law Attorne at La Attorney at Law Offices in Queens, Westchester, Manhattan Offices in Queens, Westchester, Manhattan Offices in Queens Westchester Manhattan Offices in Queens Westchester Manhattan and Long Island and Long Island www.SoressiLaw.com www.SoressiLaw.com 718.813.0360 718.813.0360 718 813 0360 718 813 0360 Jim@SoressiLaw.com Ji Ji Jim@SoressiLaw.com @S @S iL iL 6
This presentation is not designed or intended to provide financial, tax, legal, accounting or other professional advice. Such advice always requires consideration of individual facts and consideration of individual facts and circumstances on a case by case basis and privity of contract. If professional advice is sought, an individual should contract with a qualified professional to render such advice 7
Purposes of Forming an ILIT Purposes of Forming an ILIT • Deliver policy proceeds to next generation D li li d t t ti free of transfer tax • Avoid gift tax on premium payments Avoid gift tax on premium payments • Retain income tax free receipt of policy proceeds proceeds • Provide liquidity to estate • Control distribution of proceeds Control distribution of proceeds 8
Avoid Estate Tax Inclusion Avoid Estate Tax Inclusion • IRC §2042—Incidents of Ownership • Own, change beneficiary, surrender or borrow • Avoid Grantor as Trustee (CST exception example) • IRC §2036—Retained Interests IRC §2036 R t i d I t t • Right to income • Right to change beneficial interests • Right to change beneficial interests • IRC §2038—Amend, Alter, Terminate, Revoke • Careful with changes to Crummey Powers • Careful with changes to Crummey Powers • Trust not pay estate tax or estate debts or satisfy legal obligations satisfy legal obligations 9
Avoid Estate Tax Inclusion Avoid Estate Tax Inclusion • Avoid Reversionary Interest • Default to Heirs at Law • Careful with Split Dollar with Majority Sh Shareholders or Partners h ld P t • Trust Not Pay Estate Tax Or Estate Debts Or Satisfy Legal Obligations Satisfy Legal Obligations 10
Avoid Estate Tax Inclusion— Beware of Traps • Single Life ILIT with Spouse as Beneficiary • Single Life ILIT with Spouse as Beneficiary • Do not give spouse Crummey power in excess of 5 +5% under IRC §2041 § • Better yet, no Crummey power at all to spouse • A Mess, Spouse as Transferor and Beneficiary • 2 nd To Die ILIT—Two Grantors • Neither Spouse as Trustee or Beneficiary • No right to change beneficial interests 11
Avoid Estate Tax Inclusion— Beware of Traps • 2 nd To Die ILIT • 2 nd To Die ILIT—One Grantor, Spouse One Grantor Spouse Beneficiary • Neither Spouse as Trustee Neither Spouse as Trustee • No Crummey Power to Spouse • Use Gift Splitting to Maximize Gifts • How Pay Premium After Death of Grantor? • Single Life Policy on Grantor in Trust • Other Trust Assets Used to Pay Premium • Other Trust Assets Used to Pay Premium • Borrow/Split Dollar • Avoid Reciprocal Trusts p • Different Terms, Provisions & Dates of Creation 12
Avoid Gift Tax on Premium Payments Transferred to Trust • Annual Exclusion A l E l i • $13k/donor/donee • Must be present interest • Must be present interest • Checks vs. Transfers • Crummey/Hanging Powers Crummey/Hanging Powers • My 2 Cents—No Power to Change Crummey Beneficiaries or amounts (IRC §2038) and Avoid Naked Crummey Beneficiaries Crummey Beneficiaries • $5 million Gift Tax Exemption 2012 Only • Split Dollar Split Dollar • Borrowing 13
GSTT Allocation—Yes or No? GSTT Allocation Yes or No? • Dynasty Trust –Yes D t T t Y • Non-Dynasty Trust –Maybe • Potential Trap for Distributions to Beneficiaries at P t ti l T f Di t ib ti t B fi i i t ages 25, 30 & 35 • Factors to Consider—Term of Trust, Amount of Factors to Consider Term of Trust, Amount of Estate, Amount of GSTT Exemption • Be Aware of Automatic GSTT Allocation Rules 14
15 Premiums Are Greater Than GSTT Exemption Potential Issue Potential Issue
Potential Solutions Potential Solutions • Split Dollar Split Dollar • Spouse to Trust • Trust to Trust • Trust to Trust • Use of Funding Trust and Dynasty Trust • Use Income and Appreciation of Assets Initially • Use Income and Appreciation of Assets Initially Gifted • Sales to IDGT/BDIT • Sales to IDGT/BDIT • Premium Financing 16
Using Two Trusts Funding Trust Dynasty Trust Advances/Loans • Split Dollar Advances or Loans Made to Trust S lit D ll Ad L M d t T t • If Both Are Grantor Trusts, No Income Tax Consequences • Funding Trust—GPA to First Generation Funding Trust GPA to First Generation 17
What is the Transfer for Value Rule? What is the Transfer for Value Rule? The Transfer A life insurance policy is transferred Any life insurance policy (i.e. whole life or term). Any element if the policy (ownership, beneficiary change transfer of any incident of ownership). The Value The Value In return for the Transfer, the transferor receives consideration receives consideration. Consideration may include cash, goods, a business interest, transfer of another insurance policy, signing of new business agreements, assuming a loan or other items of value. 18
Exceptions to the Transfer for Value Rule Where the transfer is made to the: Insured Corporation which the Insured is a Shareholder or an Officer. Partner of the Insured. Partnership in which the Insured is a Partner. NOTE: A Grantor Trust is Treated as a NOTE: A Grantor Trust is Treated as a NOTE: A Grantor Trust is Treated as a NOTE: A Grantor Trust is Treated as a Transfer to the Insured Transfer to the Insured IF IF the Insured is the Insured is the Grantor the Grantor the Grantor the Grantor 19
An Apparent Gift Situation, But A Trap An Apparent Gift Situation, But A Trap Life Assumptions Insurance Policy $75 000 Basis $75,000 Basis $90,000 Loan $100,00 Total C.V. $100 00 Total C V Transferor Transferee (Includes loan proceeds) Transferee assumes the loan. Transferee assumes the loan. Trust is NOT a Grantor Trust 20
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