Irrevocable life insurance trusts: one of the last estate and gift tax shelters

Article Abstract:

Life insurance is a valuable tool for state and financial planning because it is flexible and has income, estate, and gift tax benefits. Irrevocable life insurance trusts shelter proceeds from estate taxes if a decedent has severed ownership three years prior to death. The trusts offer taxpayers control over income or principal of trust to beneficiaries after death, and allow integration of policies' proceeds with other assets of estates. Insurance proceeds are excluded from a gross estate if a taxpayer surrenders all incidents of ownership and access to a policy's cash surrender value. Planners also need to be aware that trustees should be granted unconditional right to acquire, terminate, or maintain a policy on a grantor's life; standards for distributing income are the same before and after death; and contributions from a grantor cannot be earmarked for insurance premia payments.

Life insurance trusts

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Some tax planning opportunities survive death

Article Abstract:

There are many planning tools and elections that executors and personal representatives of an estate can use after the death of the decedent to reduce or re-direct estate assets, and to keep income, estate and capital gains taxes as low as possible. They can value the assets at a later date (Sec. 2032), irrevocably elect to value qualifying real property based on its actual use (Sec. 2032A), make use of unlimited marital deduction (Sec. 2056), reverse a qualified terminable interest property election (Sec. 2652a) or elect a qualified domestic trust treatment (Sec. 2056). They can also make installment payments (Sec. 6166), use disclaimers (Sec. 2518), make a redemption (Sec. 303), perform basis adjustments in partnership assets (Sec. 754 and Sec. 732), select a fiscal year for income tax purposes other than the calendar year and choose suitable distribution dates.

Planning

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Elections provide post-mortem tools for reducing or deferring estate liabilities

Article Abstract:

Post-mortem planners must choose among different elections to maximize immediate tax savings. Section 2031(a) holds that assets in a decedent's gross estate generally are valued at fair market value (FMV), but allows executors of an estate to value assets at a later date. Assets disposed of at a later date will be valued at the date of the disposal and assets remaining in an estate will be valued at FMV at six months after a decedent's death. Options other than FMV, which can be used to defer tax payments or to reduce overall tax burdens, include special-use valuation; estate tax installment payments; and unlimited marital deductions. Except for the election of paying estate tax payments in installments, elections generally are irrevocable, and planners must consider the consequences of an election's termination.

Transfer taxes

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