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.
What are some common ways to avoid this dilemma when using a trust and life insurance in regards to estate planning?
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 , which could include the insured’s right to; 
- 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. “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”. 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.” 
Posted in Estate Tax, Taxation | Tagged: Beneficiary, estate planning, Financial services, Inheritance tax, insurance, life insurance, Ownership, Trust law | Leave a Comment »
Posted by William Byrnes on July 18, 2013
The “irrevocable” label might have some clients feeling like they are locked into previously established irrevocable trusts for life, which might not always be the case. There are many reasons why a client might remain interested in preserving an irrevocable trust, but after the fiscal cliff deal made the generous $5 million estate tax exemption and spousal portability permanent, there are equally strong reasons why a client might prefer to terminate. …
The choice to terminate will force clients to reevaluate insurance and other trust held assets and lead to what are often long overdue replacement or reallocation discussions.
When Can an Irrevocable Trust Be Terminated?
Read the full analysis at ThinkAdvisor: http://www.thinkadvisor.com/2013/06/17/the-not-so-irrevocable-trust-unlocking-trust-asset
Posted in Estate Tax, Taxation, Trusts, Wealth Management | Tagged: $5 million, advanced markets, estate planning, Illinois, Internal Revenue Service, law, Organizations, Tax exemption, Trust law, United States, Wealth Management | Leave a Comment »
Posted by William Byrnes on August 19, 2011
The collapse of the secondary market for life insurance during the recent financial crisis left a lot of trusts anxious to dispose of large face value life insurance policies. Trusts that handed back policies in satisfaction of premium finance loans were then struck, along with their grantors, with massive tax bills for what is known as cancellation of indebtedness or cancellation of debt (COD) income.
The IRS recently released proposed regulations that address the income tax treatment of cancellation of debt income of trusts. Although this highly technical area of the law may not be of interest to lay audiences, it is a vital aspect for advisors selling high-value life insurance policies.
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 an interesting case involving a premium financed policy in Advisor’s Journal, see Lawsuit Seeks to Hold Insurer Responsible for Suspicious Death (CC 10-101).
For in-depth analysis of life settlements (which can be structured as a premium finance transaction), see Advisor’s Main Library: B—The Life Settlement Industry.
Posted in Wealth Management | Tagged: Financial services, insurance, Internal Revenue Service, IRS, life insurance, Premium Financing, tax, Trust law | Leave a Comment »
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!
Posted in Trusts | Tagged: accounting, Beneficiary, Fiduciary, tax, Taxation, Trust law, Trustee, United States | Leave a Comment »
Posted by William Byrnes on March 6, 2011
Valuation discounts will always be a disputed issue between taxpayers and the IRS, but as illustrated by the recently published Ninth Circuit Court of Appeals case, a properly timed gift can still qualify for a discount. The parents contributed cash, securities, and real property to an LLC and then transferred LLC interests to a trust (“the children’s trust”) naming their children as beneficiaries.
The IRS rejected the valuation discount, claiming that the parents did not make a gift of the LLC interests to the trusts as they claimed, but instead made an indirect gift of the assets owned by the LLC. The IRS also argued that, even if the LLC were funded prior to the gifting of the LLC interests to the children, the transaction’s two steps—transfer of assets to the LLC and the gift of the LLC interest to the children’s trust—were really a single transaction, an indirect gift of the assets, under the step transaction doctrine. 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).
Posted in Estate Tax | Tagged: Internal Revenue Service, IRS, Limited liability company, tax, Trust law, United States, United States Court of Appeals for the Ninth Circuit, Valuation (finance) | Leave a Comment »
Posted by William Byrnes on February 8, 2011
Recently some wealth managers have established trustee services with regards to retirement accounts. It’s a good fit, generally, when the wealth manager can offer clients information regarding deductible contributions to a retirement account, and further act as a fiduciary vis-à-vis trustee of those funds.
What are the basic requirements in order to act in the capacity as a trustee for IRA and other retirement account purposes?
First, an Individual Retirement Account (IRA) must be a trust created or organized in the United States for the exclusive benefit of an individual or his beneficiaries. Such trust must be maintained at all times as a domestic trust in the United States. The instrument creating the trust must be in writing.
Secondly, the trustee of an IRA trust may be a person other than a bank if the person demonstrates to the satisfaction of the Commissioner of the Internal Revenue Service that the manner in which the person will administer trusts will be consistent with the requirements of the tax code. The person must submit a written application including the information discussed below. Read further at AdvisorFYI
Posted in Pensions, Trusts | Tagged: Individual Retirement Account, Internal Revenue Service, Retirement, Roth IRA, tax, Trust law, Trustee, United States | Leave a Comment »
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.
Posted in Estate Tax | Tagged: Beneficiary, Family, Generation-skipping transfer tax, gift tax, Supreme Court of the United States, tax, Trust law, U.S. Supreme Court | Leave a Comment »
Posted by William Byrnes on November 12, 2010
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Charitable contributions offer an opportunity to do good in the community while reaping tax benefits, but the tax benefit of a charitable contribution can be jeopardized by poor planning. Especially challenging can be the structuring of contributions by complex trusts as illustrated by the recently released IRS ruling, ILM 201042023.
There, a trust’s charitable contribution deduction was limited to the trust’s basis in the property; a deduction was not permitted for unrealized appreciation of the donated property. 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 previous coverage of the benefits of charitable giving, see Use Charitable Giving to Enhance Family Business Succession Planning (CC 10-76).
For in-depth analysis of the use of charitable giving in estate planning, see Advisor’s Main Library: F�Estate Planning Through Charitable Contributions.
Posted in Taxation, Wealth Management | Tagged: Charitable contribution, Charitable organization, Donation, estate planning, Internal Revenue Service, tax, Tax deduction, Trust law | Leave a Comment »
Posted by William Byrnes on September 24, 2010
Why is this Topic Important to Wealth Managers? Provides a view with respect to revocable trust concepts and estate planning. Presents identifying factors of the trust, what it’s commonly used for, as well as some of the benefits and detriments of its implementation.
This week has mainly discussed the use of trusts with characteristics of complete transfers by grantors. This edition will explore the revocable nature of trusts and how they are applicable to estate planning.
The main difference between a revocable trust and one that is not, is that “the settlor reserves the right to terminate the trust and recover the trust property and any undistributed income.” “The creation of a revocable living trust involves either the transfer of property to one or more trustees or the settlor’s declaration that he holds the property in trust for himself and that upon his death the property is to be held for other beneficiaries.”
For the complete blogticle and its analysis, see AdvisorFYI.
Posted in Uncategorized | Tagged: estate planning, law, Living trust, Property, Settlor, Trust law, Trustee, United States | Leave a Comment »