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William Byrnes (Texas A&M) tax & compliance articles

Posts Tagged ‘Beneficiary’

Gifting Life Insurance Policies: Not a Simple Matter

Posted by William Byrnes on October 17, 2013

Making a gift of a life insurance policy can prove to be anything but simple for clients who may not know what questions to ask in order to ascertain the potential tax consequences of the transaction. Transferring a policy that is subject to a policy loan can prove even more problematic, even if the transferee is a family member and the transfer is intended entirely as a gift.

Though the rule’s name might suggest otherwise, the transfer for value rule can create a serious tax trap for a client who transfers a life insurance policy, even if nothing tangible actually changes hands in the transaction.   Want to read more?  Open access content at Think Advisor!

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Can Clients 1035 an Inherited Annuity?

Posted by William Byrnes on September 6, 2013

2014_tf_on_investments-mAnnuity products are one area in which trends in contract features are constantly changing as insurance companies endeavor to more effectively meet the needs of annuity investors and with the attendant problem that beneficiaries of inherited annuities could end up with antiquated investment products.

This constant evolution of investment trends may have your clients wondering what type of value their annuities will offer beneficiaries after their death. The IRS has just blessed a solution to this planning dilemma by allowing a beneficiary to exchange inherited annuities for another annuity product that more accurately reflects the beneficiary’s investment goals.

Read the complete analysis by William Byrnes and Robert Bloink at > Think Advisor <

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Incidents of Ownership and Burden on the Estate

Posted by William Byrnes on August 12, 2013

Why is this Topic Important to Wealth Managers?   Discusses estate tax considerations in regards to life insurance policies.  Also, includes a detailed dialogue of the incidents of ownership concept. 

What do most wealth managers try to avoid when planning with life insurance and trusts?

That the Gross Estate for Estate Tax calculations would include the death benefit from the policy in the estate.[1]

What are some common ways to avoid this dilemma when using a trust and life insurance in regards to estate planning?[2]

The insured should never own the policy; “it should be owned from inception” by the trust or third party.

  • A trustee takes “all the actions to purchase the policy on the life of the insured”.
  • The trustee should be “authorized but not required to purchase insurance on the life of anyone whose life the trust’s beneficiaries have an insurable interest.”
  • The trust explicitly prohibits the insured from obtaining any interest whatsoever that the trust may purchase on the insured’s life.
  • The trust does not require, but rather permits the premium payments.
  • Trust is well funded, beyond that of one year of premium payments.
  • The trustee acts in the best interest of the beneficiaries.

A revisionary interest will give rise to incidence of ownership [3], which could include the insured’s right to; [4]

  • Cancel, assign or surrender the policy.
  • Obtain a loan on the cash value of the policy or pledge the policy as collateral for a loan.
  • Change the beneficiary, change contingent beneficiaries, change beneficiaries share of the proceeds.

When discussing incidents of ownership, naturally the 3 year rule should be further expounded.[5] “The 3-year ‘bring-back’ rule” is applicable, “with respect to dispositions of retained interests in property which otherwise would have been includable in the gross estate”.[6]  As discussed in AUS Main Libraries Section 8, C—Lifetime Gifts Of Insurance And Annuities-“Gifts Within Three Years Of Death, essentially, the rule as it applies to life insurance means that any policy transferred out of the estate of the insured within 3 years of his/her death, the policy proceeds are brought back into the gross estate for estate tax calculations.

It is generally accepted that “the trust should be established first, with a transfer of cash from the grantor to be used to pay the initial premium” or a few years of premiums.  “The trustee would then submit the formal application, with the trust as the original applicant and owner.”  Generally, the insured will “participate only to the extent of executing required health questionnaires and submitting to any required physical examination.”  Again the key is that the, “grantor/insured not have possessed at any time anything that might be deemed an incident of ownership with respect to the policy.” [7]

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Subsequent Divorce Decree’s Impact on Beneficiary Designation

Posted by William Byrnes on July 18, 2011

Which prevails when it is time to make a claim, a last in time divorce decree or a beneficiary designation made at the time of the application years ago?  A wife had her estranged husband, sign a separation and property-settlement agreement to release him from any claims to her estate or property.  When the wife passed away, her former husband sought the life insurance proceeds, as did her mother and son.  The answer is provided in a cautionary tale of beneficiary designations told in a recent 4th circuit case.

Read this complete analysis of the impact at AdvisorFX (sign up for a free trial subscription with full access to all of the planning libraries and client presentations if you are not already a subscriber)

For previous coverage of beneficiary designations in Advisor’s Journal, see The Effect of Divorce on Life Insurance Beneficiary Designations (CC 10-39) & Don’t Overlook Beneficiary Designations and Settlement Options (CC 09-28).

For in-depth analysis of beneficiaries and settlement options, see Advisor’s Main Library: D – Problems In Beneficiary Designations.

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Advisor/Trustee Ends Up Responsible for a Trust’s Tax Bill?

Posted by William Byrnes on March 19, 2011

You’d better think twice before agreeing to act as trustee for your clients’ trusts, since doing so can cost you far more than the goodwill and fees it generates.

We all know that, depending on the circumstances, a trust, its grantor, or its beneficiaries can be held responsible for tax liability stemming from trust income.

What about its trustee?

Although trustees are not usually personally responsible for a trust’s taxes, a trustee can be stuck with the tax bill if the trustee breaches his or her fiduciary duty to the beneficiaries. A U.S. District Court recently considered a trustee’s liability for GST taxes when the trust’s beneficiaries claimed that the trustee failed to keep them informed of their potential liability for taxes stemming from trust distributions.

The trustees’ mistake in this case could cost them over $1 million.  Read the full analysis by linking to AdvisorFX!

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Estate Asks Supreme Court to Consider GST Tax Grandfathering Exemption

Posted by William Byrnes on January 5, 2011

An estate has asked the U.S. Supreme Court to consider whether the GST tax “grandfathering exemption” is ambiguous.  Two circuit courts of appeal have held that the statute is ambiguous while another two circuits hold that it is plain and unambiguous.

The Supreme Court is being asked to settle the split between the circuits.

The Generation Skipping Trusts

A generation skipping trust is a trust designed to shift property from one generation to another without passing the property through an intervening generation—e.g. a trust that transfers property from grandparents to their grandchildren.  Generally the “child beneficiaries” (children of the grantor) take only an income interest in the trust with grandchildren taking a remainder interest in the trust.  When the child beneficiaries die, trust assets will be transferred to the grandchildren.  Assuming the child beneficiaries took only an income interest in the trust and did not hold any incidents of ownership in the trust, the trust will not be included in the children’s estates when they die.

So, for example, if Grandfather funds a trust will for $5 million, naming his three adult children as income beneficiaries and his grandchildren as remainder beneficiaries, the trust is a generation skipping trust.  Read this complete article at AdvisorFX (sign up for a free trial subscription with full access to all of the planning libraries and client presentations if you are not already a subscriber).

For in-depth analysis of the generation skipping transfer tax, see Advisor’s Main Library: Section 2.1 A—Generation Skipping Transfers Explained

We invite your questions and comments by posting them below or by calling the Panel of Experts.


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