Life
Insurance Trusts
These are trusts
designed to own or be the beneficiary of life insurance or
both. They usually contain certain technical provisions
governing the trustee's powers concerning life insurance.
One kind is revocable, designed merely to provide for estate
tax savings by using the marital deduction and credit
against tax and to provide for management of the insurance
funds by someone other than the beneficiaries. The insured
can retain the right to change beneficiaries and to borrow
against the policy if it has cash value. The insured's will
very often pours over all other assets to this trust when
the insured dies.
The other kind is
an irrevocable life insurance trust. The insured gives up
all rights over the policy and transfers it to a trust of
which he or she is not trustee or a beneficiary. The object
is usually to remove the proceeds from the taxable estate of
the insured and sometimes the surviving spouse as well and
to provide for trustee management of the proceeds. Special
provisions of a technical nature called Crummey powers can
be used to allow yearly gifts to the trust up to $5000 per
trust beneficiary to be made free of gift tax to pay
premiums on the policy. The gift tax is avoided on transfer
of an existing policy into the trust by borrowing against
the policy's cash value of the policy. Frequently a new
policy is purchased and transferred to the trust so there is
no gift tax problem on creation of the trust.
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