Wealth Preservation Trust2019-04-05T12:56:51-07:00
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The Wealth Preservation Trust – Estate Tax and Asset Protection Planning

Many people have substantial life insurance policies that ensure their lives. The reasons to have such life insurance policies are many. Some people have them in order to provide for assets to care for their family in the event that the premature death of the breadwinner. Others want to make provision for their own retirement, using cash value life insurance policies that could build up in value and be ultimately used to supplement retirement income. Others purchase life insurance for the purpose of providing liquid ditty in their estates in order to pay income taxes, federal estate taxes, and debts.

If a life insurance policy has a designated beneficiary, the proceeds of the policy will not go through the Probate process, because life insurance proceeds are generally not subject to income tax.  Many people believe that they are not subject to any taxes at all. This is not the case. The proceeds of life insurance are included in your taxable estate for purposes of the federal estate tax (i.e. the “Death Tax”) and, as a result, may be taxed at your death.

Life insurance that is paid to a surviving U.S.. citizen spouse is not subject to this federal estate tax because of a tax benefit called the Unlimited Marital Deduction. With proper planning, the unlimited marital deduction can also be made available for life insurance proceeds that are passed to a non-citizen spouse.  However, this will only mean that the taxation of life insurance proceeds is delayed rather than completely avoided.   Because a surviving spouse often does not use a large amount of life insurance proceeds, the estate of the surviving spouse can be quite large and possibly subject to federal estate income taxation.

There was no federal estate tax year in tax year 2010.   However, due to action taken by Congress in December of 2010, the federal estate tax was reinstated retroactive to January 1, 2010, with a $5,000,000 “applicable exclusion amount” (i.e. AEA) and a 35% tax rate for estates that were greater than the $5,000,000 AEA.   The new legislation also kept the $5,000,000 AEA applicable exclusion amount for tax year 2011, which with the AEA rising to $5,120,000 for 2012.  In 2015, the AEA was $5,430,000.

Today, in 2019, the AEA is $11,400,009.

The Wealth Preservation Trust is an estate planning tool that can be used to avoid both income taxation and the federal estate tax on life insurance proceeds.  This type of trust is also known as an Irrevocable Life Insurance Trust, or “ILIT.”

The ILIT is an additional trust that you create in addition to a revocable living trust, as a part of the total estate plan for your family. It is a separate trust from your living trust, and it owns your life insurance, pays the premiums on your life insurance, and is the beneficiary of your life insurance.  An ILIT can accomplish three major estate planning objectives for you:

1.   The proceeds of the life insurance can be passed on free from the federal estate tax;

2.   The ILIT can be structured with the Castle Trust Planning option for your spouse, partner, children or other heirs;

3.   By loaning cash to your estate (or buying assets from your estate), the life insurance proceeds can be used to pay the death expenses, including taxes and debts for you and your spouse or partner.

Generally, the ILIT is used to own a life insurance policy on your life.  If an Irrevocable Trust purchases a life insurance policy, or an existing life insurance policy is given to the trust by the owner, the value of the insurance proceeds will not be included in your estate, so long as you do not retain any “incidents of ownership” in that policy.  This means that you must not retain control over the use of that policy in any way or it will be included as part of your estate.  This is why an ILIT is irrevocable.

You can transfer your existing life insurance policies into an ILIT in the form of a gift, but there is a risk involved.  If you die within three years of gifting the existing policies into the ILIT, they will be included in your  taxable estate, no matter what planning you have done.  If this is a greater risk than you want to take, the trustee of your ILIT may apply for and purchase new policies.

An ILIT can also help provide liquidity for your estate. Upon your death, there needs to be cash (such as insurance proceeds) in your main trust in order to pay expenses.  The ILIT can purchase the non-liquid assets from the main trust, using cash provided by the life insurance proceeds.  This sale is income tax-free because assets receive a step-up in basis at the time of death.  The result is that the ILIT then retains the non-liquid assets and the main trust has cash to pay expenses.

Paying the Premiums on the ILIT.  Through gifts of cash from you or others, the ILIT receives funds to pay premiums on life insurance policies it owns on your life. Gifts to an ILIT are normally subject to the federal gift tax.  However, this tax can be avoided by giving your beneficiaries a demand right.  When a gift is made to the trust, your trustee is required to notify your beneficiaries of the gift.  Upon notification, the beneficiaries are entitled to take their share of the gift out of the ILIT during a limited period of time after the gift is made.  When this time period has expired, and the beneficiaries have not chosen to take the funds, your trustee may then use the funds to pay the life insurance premiums. This demand right eliminates any federal gift tax on the gift.

Some people are uncomfortable knowing that their beneficiaries have the right to take out the gifts made to the trust.  However, this is rarely a problem when the beneficiaries understand the overall purpose of the estate plan.  It also helps to make clear to them that a relatively small investment now in life insurance premiums will result in a much larger benefit to all the beneficiaries in the future. Once the ILIT is properly explained to the beneficiaries, the likelihood of a beneficiary disturbing the plan is very remote.

By creating an ILIT, you can ensure that all the life insurance you purchase goes to the beneficiaries you choose, instead of potentially giving up large percentages of it to the government in taxes.

Planning for the ILIT is generally completed in three (3) steps:

·        Initial Consultation (1 hour)

·        Plan Design Meeting (1-2 hours)

·        Signing Appointment (1 hour)

I am as close as your telephone, fax, or e-mail, when it comes to scheduling a free one-hour initial consultation.   I am generally available during office hours, and usually can return after-hours calls, faxes and emails by the next business day.

Attorney Robert P. Bergman, Board Certified Specialist in Estate Planning, Trust and Probate Law, assists families in the San Francisco Bay Area with Estate Planning, Special Needs Planning for children and adults, special planning for retirement plan assets, and trust administration.

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