Irrevocable Life Insurance Trust: A General Procedural Outline

August 31, 2017

As estate planningPlanning in advance of disability, incapacity, or death to make sure that key life issues have been addressed while the person is still of sound mind and able to understand and sign key documents such as Power of Attorneys, Power of Attorneys for Health Care, Wills, and Trusts to form a strategy and provide for the administration and disposition of his or her assets upon death or upon incapacity. attorneys serving southeast Wisconsin, we work with our clients to create an Irrevocable Life Insurance TrustA trust set up to hold life insurance that is irrevocable and considered separate from the person creating the trust and is used to exclude life insurance from the taxable gross estate at death. It is often referred to as an ILIT. (ILIT) to prevent life insurance from inclusion in the client’s federal taxable estate at death. Moreover, we also create ILITs to help protect life insurance or insurance policies from a nursing home or other potential creditors.

An Irrevocable Life Insurance TrustA trust set up to hold life insurance that is irrevocable and considered separate from the person creating the trust and is used to exclude life insurance from the taxable gross estate at death. It is often referred to as an ILIT. (ILIT) is set up to allow GrantorSee Settlor. to pay premiums on life insurance owned by the trustThe arrangement creating the legal ownership of assets by a trustee for the benefit of the Settlor and/or other beneficiaries., without incurring a gift taxA tax on gifts that are completed from one person to another. Wisconsin does not have a gift tax, but there is a federal gift tax. We often can gift in excess of the “annual exclusion” amount that is currently $14,000.00 per donee per year without incurring any gift tax or reporting requirements. The gift tax is often misunderstood and should be discussed if undertaking any significant gifting. The gift tax lifetime “exclusion” amount is $5.34 million for 2014. and without the life insurance policy being included as an asset owned by GrantorSee Settlor. upon Grantor’s death.  This allows the life insurance policy, which is owned by the ILIT, to not incur estate taxThe Federal tax that is imposed on transfer of assets at death, especially to non-spouses. The current Federal Estate Tax, simply speaking, is for assets in excess of 5.34 million dollars for the year 2014. There is not currently an estate tax in Wisconsin, but approximately 20 other states still have some form of estate tax. upon the Grantor’s death.  This normally results in more funds being received by the beneficiaries since they willA written document that sets forth and names the personal representative who will be in charge of overseeing the probate process and names the specific bequest and residual beneficiaries of property who are to receive and inherit assets and property through probate. A Will does not avoid probate, and must be properly drafted and executed to be legal. A Will can also avoid the use of a surety bond in many instances and can help utilize an “informal” Wisconsin probate process if it has the proper clauses and attestation clause. receive the life insurance estate taxThe Federal tax that is imposed on transfer of assets at death, especially to non-spouses. The current Federal Estate Tax, simply speaking, is for assets in excess of 5.34 million dollars for the year 2014. There is not currently an estate tax in Wisconsin, but approximately 20 other states still have some form of estate tax. free.

An Irrevocable Life Insurance Trust: Only the Beginning

The creation of an ILIT is only the beginning of the ILIT estate planningPlanning in advance of disability, incapacity, or death to make sure that key life issues have been addressed while the person is still of sound mind and able to understand and sign key documents such as Power of Attorneys, Power of Attorneys for Health Care, Wills, and Trusts to form a strategy and provide for the administration and disposition of his or her assets upon death or upon incapacity. process. The ILIT willA written document that sets forth and names the personal representative who will be in charge of overseeing the probate process and names the specific bequest and residual beneficiaries of property who are to receive and inherit assets and property through probate. A Will does not avoid probate, and must be properly drafted and executed to be legal. A Will can also avoid the use of a surety bond in many instances and can help utilize an “informal” Wisconsin probate process if it has the proper clauses and attestation clause. receive gifted funds to pay for life insurance, while still allowing the use and advantages of the annual gift taxA tax on gifts that are completed from one person to another. Wisconsin does not have a gift tax, but there is a federal gift tax. We often can gift in excess of the “annual exclusion” amount that is currently $14,000.00 per donee per year without incurring any gift tax or reporting requirements. The gift tax is often misunderstood and should be discussed if undertaking any significant gifting. The gift tax lifetime “exclusion” amount is $5.34 million for 2014. exclusion (currently $14,000 per person per year for 2017).

What Procedures Follow the Creation of an Irrevocable Life Insurance Trust?

The following is a brief explanation of the procedures that our clients and trustees normally follow. After an ILIT has been established and Funded with a Life Insurance Policy, our estate planning lawyers guide our clients and trustees through the following procedures:

1. Establish an ILIT Checking Account

The Irrevocable Life Insurance TrustA trust set up to hold life insurance that is irrevocable and considered separate from the person creating the trust and is used to exclude life insurance from the taxable gross estate at death. It is often referred to as an ILIT. needs a checking account to pay the life insurance premium and to receive funds from the GrantorSee Settlor.. The trustThe arrangement creating the legal ownership of assets by a trustee for the benefit of the Settlor and/or other beneficiaries. name is on the account. The TrusteeThe person or company named in a trust to manage property and assets of a trust. Usually a trust will name an initial trustee or co-trustees and successor trustees. A trustee has the duty to act in the best interest of the person for whom they are managing the funds and is considered a Fiduciary. Most people that set up Revocable Trusts to avoid probate, name themselves as Trustee and also name successor trustees to take over upon death or upon incapacity. has the right to sign checks and have power over this account.  The trustThe arrangement creating the legal ownership of assets by a trustee for the benefit of the Settlor and/or other beneficiaries. EIN is used as the “tax ID number” for this account – not anyone’s social security number.

The GrantorSee Settlor. is never a TrusteeThe person or company named in a trust to manage property and assets of a trust. Usually a trust will name an initial trustee or co-trustees and successor trustees. A trustee has the duty to act in the best interest of the person for whom they are managing the funds and is considered a Fiduciary. Most people that set up Revocable Trusts to avoid probate, name themselves as Trustee and also name successor trustees to take over upon death or upon incapacity. on an ILIT. The GrantorSee Settlor. (the person who set up the trustThe arrangement creating the legal ownership of assets by a trustee for the benefit of the Settlor and/or other beneficiaries. and who’s life the policy is normally on) is not on this account as a signor, POA, TrusteeThe person or company named in a trust to manage property and assets of a trust. Usually a trust will name an initial trustee or co-trustees and successor trustees. A trustee has the duty to act in the best interest of the person for whom they are managing the funds and is considered a Fiduciary. Most people that set up Revocable Trusts to avoid probate, name themselves as Trustee and also name successor trustees to take over upon death or upon incapacity. or owner in anyway. It is not Grantor’s account.

2. Grantor Transfers Funds Every Year to the Trustee/Checking Account

The GrantorSee Settlor. should not pay a premium directly on either a new or existing trustThe arrangement creating the legal ownership of assets by a trustee for the benefit of the Settlor and/or other beneficiaries. policy. All premiums should be paid by the TrusteeThe person or company named in a trust to manage property and assets of a trust. Usually a trust will name an initial trustee or co-trustees and successor trustees. A trustee has the duty to act in the best interest of the person for whom they are managing the funds and is considered a Fiduciary. Most people that set up Revocable Trusts to avoid probate, name themselves as Trustee and also name successor trustees to take over upon death or upon incapacity. from a trust-owned bank account as mentioned above. The Grantor’s gifts should be deposited into the trustThe arrangement creating the legal ownership of assets by a trustee for the benefit of the Settlor and/or other beneficiaries. checking account.

3. The Trustee Pays the Life Insurance Premium from the Trust Checking Account

The TrusteeThe person or company named in a trust to manage property and assets of a trust. Usually a trust will name an initial trustee or co-trustees and successor trustees. A trustee has the duty to act in the best interest of the person for whom they are managing the funds and is considered a Fiduciary. Most people that set up Revocable Trusts to avoid probate, name themselves as Trustee and also name successor trustees to take over upon death or upon incapacity. writes and signs a trustThe arrangement creating the legal ownership of assets by a trustee for the benefit of the Settlor and/or other beneficiaries. check from the trustThe arrangement creating the legal ownership of assets by a trustee for the benefit of the Settlor and/or other beneficiaries. checking account for the premium payment.

The GrantorSee Settlor. must make the gift/transfer early enough to allow the trusteeThe person or company named in a trust to manage property and assets of a trust. Usually a trust will name an initial trustee or co-trustees and successor trustees. A trustee has the duty to act in the best interest of the person for whom they are managing the funds and is considered a Fiduciary. Most people that set up Revocable Trusts to avoid probate, name themselves as Trustee and also name successor trustees to take over upon death or upon incapacity. to mail out the 30-day Crummey notices. The trustThe arrangement creating the legal ownership of assets by a trustee for the benefit of the Settlor and/or other beneficiaries. must have the cash resources available to meet the beneficiaryA person who will receive something, possibly cash or real estate or personal property, through a Will or trust or income from a Will or Trust. A beneficiary can be a Specific Bequest beneficiary or a Residual beneficiary. withdrawal rights for the 30-day period. Once the insurance policy has sufficient accessible cash value, then the 30-day waiting from grantor’s gift is not as important for some ILITs.

Therefore, we suggest that at least 60 days prior to the expected annual premium being due, GrantorSee Settlor. transfer funds to the trustThe arrangement creating the legal ownership of assets by a trustee for the benefit of the Settlor and/or other beneficiaries. checking account.

4. Mailing of Crummey Notices

We strongly suggest that the TrusteeThe person or company named in a trust to manage property and assets of a trust. Usually a trust will name an initial trustee or co-trustees and successor trustees. A trustee has the duty to act in the best interest of the person for whom they are managing the funds and is considered a Fiduciary. Most people that set up Revocable Trusts to avoid probate, name themselves as Trustee and also name successor trustees to take over upon death or upon incapacity. mail the Crummey notices immediately upon the deposit being made by GrantorSee Settlor.. We also strongly suggest that these notices be sent certified with a return receipt. It’s very important that the notices be marked and initialed by each beneficiaryA person who will receive something, possibly cash or real estate or personal property, through a Will or trust or income from a Will or Trust. A beneficiary can be a Specific Bequest beneficiary or a Residual beneficiary..

The Crummey notices so initialed by each beneficiaryA person who will receive something, possibly cash or real estate or personal property, through a Will or trust or income from a Will or Trust. A beneficiary can be a Specific Bequest beneficiary or a Residual beneficiary. and the return receipts should be kept with the trustThe arrangement creating the legal ownership of assets by a trustee for the benefit of the Settlor and/or other beneficiaries. file permanently. If an IRS audit ever occurred, it would then be easy to prove that the Crummey notices were sent and received each year.  Remember, that any audit is most likely to occur after the death of GrantorSee Settlor..

5. Crummey Notices Briefly Explained

For tax purposes, in order to qualify for the annual gift taxA tax on gifts that are completed from one person to another. Wisconsin does not have a gift tax, but there is a federal gift tax. We often can gift in excess of the “annual exclusion” amount that is currently $14,000.00 per donee per year without incurring any gift tax or reporting requirements. The gift tax is often misunderstood and should be discussed if undertaking any significant gifting. The gift tax lifetime “exclusion” amount is $5.34 million for 2014. exclusion, the ILIT beneficiaries must have a legal right to withdraw funds from the trustThe arrangement creating the legal ownership of assets by a trustee for the benefit of the Settlor and/or other beneficiaries.. Failure to follow the proper “Crummey” procedures willA written document that sets forth and names the personal representative who will be in charge of overseeing the probate process and names the specific bequest and residual beneficiaries of property who are to receive and inherit assets and property through probate. A Will does not avoid probate, and must be properly drafted and executed to be legal. A Will can also avoid the use of a surety bond in many instances and can help utilize an “informal” Wisconsin probate process if it has the proper clauses and attestation clause. result in a taxable gift to the trustThe arrangement creating the legal ownership of assets by a trustee for the benefit of the Settlor and/or other beneficiaries..

However, it is normally in the beneficiaries’ best interest to leave the money in the trustThe arrangement creating the legal ownership of assets by a trustee for the benefit of the Settlor and/or other beneficiaries. to pay the insurance premiums, so when the GrantorSee Settlor. passes away, the insurance funds can pass to the beneficiaries’ estate taxThe Federal tax that is imposed on transfer of assets at death, especially to non-spouses. The current Federal Estate Tax, simply speaking, is for assets in excess of 5.34 million dollars for the year 2014. There is not currently an estate tax in Wisconsin, but approximately 20 other states still have some form of estate tax. free. To make this work, the gift must be considered for tax purposes to be a current or “present” gift to the beneficiaries. The Crummey right of withdrawal given to each beneficiaryA person who will receive something, possibly cash or real estate or personal property, through a Will or trust or income from a Will or Trust. A beneficiary can be a Specific Bequest beneficiary or a Residual beneficiary. makes the gift a current gift to the beneficiaryA person who will receive something, possibly cash or real estate or personal property, through a Will or trust or income from a Will or Trust. A beneficiary can be a Specific Bequest beneficiary or a Residual beneficiary. for tax purposes, thus allowing the use of the annual gift taxA tax on gifts that are completed from one person to another. Wisconsin does not have a gift tax, but there is a federal gift tax. We often can gift in excess of the “annual exclusion” amount that is currently $14,000.00 per donee per year without incurring any gift tax or reporting requirements. The gift tax is often misunderstood and should be discussed if undertaking any significant gifting. The gift tax lifetime “exclusion” amount is $5.34 million for 2014. exclusion.

6. The Value of Crummey Powers and Notices ILIT

In order to qualify for the annual gift taxA tax on gifts that are completed from one person to another. Wisconsin does not have a gift tax, but there is a federal gift tax. We often can gift in excess of the “annual exclusion” amount that is currently $14,000.00 per donee per year without incurring any gift tax or reporting requirements. The gift tax is often misunderstood and should be discussed if undertaking any significant gifting. The gift tax lifetime “exclusion” amount is $5.34 million for 2014. exclusion – currently $14,000.00 per person per year – there has to be an immediate gift to the beneficiaries for tax purposes.

Without the Crummey power (the right of the beneficiaryA person who will receive something, possibly cash or real estate or personal property, through a Will or trust or income from a Will or Trust. A beneficiary can be a Specific Bequest beneficiary or a Residual beneficiary. to withdraw funds from the trustThe arrangement creating the legal ownership of assets by a trustee for the benefit of the Settlor and/or other beneficiaries.), the transfer to an irrevocable trustA trust that cannot be terminated, revoked or amended by the creating person. In Wisconsin and in estate planning an irrevocable trust can refer to a trust that is set up to protect assets from a nursing home and Medical Assistance if prepared and funded well in advance. See Using Trusts to Protect Assets from Nursing Homes would not qualify for tax purposes as an immediate true gift to the beneficiaries. It would simply be a taxable gift to the trustThe arrangement creating the legal ownership of assets by a trustee for the benefit of the Settlor and/or other beneficiaries.. Giving the Crummey power right of withdrawal to each beneficiaryA person who will receive something, possibly cash or real estate or personal property, through a Will or trust or income from a Will or Trust. A beneficiary can be a Specific Bequest beneficiary or a Residual beneficiary. results in gifts up to the annual gift taxA tax on gifts that are completed from one person to another. Wisconsin does not have a gift tax, but there is a federal gift tax. We often can gift in excess of the “annual exclusion” amount that is currently $14,000.00 per donee per year without incurring any gift tax or reporting requirements. The gift tax is often misunderstood and should be discussed if undertaking any significant gifting. The gift tax lifetime “exclusion” amount is $5.34 million for 2014. exclusion amount to not count as taxable gifts. The gifts to the ILIT are treated as immediate gifts to the beneficiaries since they had the real legal right to withdraw the gifted funds for a 30-day period.

Why All of These Steps Are Necessary and Should Only be Followed with the Advice of an Attorney?

For federally taxable estates, it is not only crucial that the ILIT be initially set up and funded properly, but that the proper procedures are followed consistently. Wokwicz Law Offices has guided clients through the creation and funding of ILIT for decades, including ensuring that our clients understand the appropriate procedures to maintain an ILIT in good standing.

Let’s Discuss an ILIT and Your Needs

We discuss life insurance trusts with our clients, where appropriate, as part of the estate planningPlanning in advance of disability, incapacity, or death to make sure that key life issues have been addressed while the person is still of sound mind and able to understand and sign key documents such as Power of Attorneys, Power of Attorneys for Health Care, Wills, and Trusts to form a strategy and provide for the administration and disposition of his or her assets upon death or upon incapacity. process to compliment clients’ Last Wills and Testaments, Revocable and Irrevocable Trusts, Transfer on Death Deeds and Powers of Attorney. We invite you to contact our office to set up an appointment.