TITLE

Generation-Skipping Traps In Multi-Generational Life Insurance Trusts

AUTHOR(S)
Gallo, Jon J.
PUB. DATE
June 2002
SOURCE
Journal of Financial Planning;Jun2002, Vol. 15 Issue 6, p26
SOURCE TYPE
Academic Journal
DOC. TYPE
Article
ABSTRACT
The article discusses the efficiency of irrevocable life insurance tax in leveraging generation-skipping transfer tax exemption in the U.S. Leveraging is the process by which each dollar of exclusion or exemption allocated to a transfer insulates some multiple of itself from the generation-skipping tax system. Using the generation-skipping tax exemption in this manner offers two important advantages, namely, any appreciation in the value of the assets owned by the exempt generation-skipping trust will escape all transfer taxes when the children die and will instead pass tax-free to the grandchildren and the trust may be protected from the claims of creditors and, to some degree, from claims of ex-spouses. For an insurance trust to function as a generation-skipping trust, the trust must be drafted to avoid creating general powers of appointment in the beneficiaries, which would subject the trust corpus to estate taxation at their deaths. But a paradox exists because the most common method of funding an insurance trust is to grant the beneficiaries a Crummey withdrawal right. A Crummey withdrawal power is a general power of appointment over the property subject to withdrawal. Even if a generation-skipping transfer tax exemption is allocated to all transfers to an insurance trust, the lapse of the beneficiaries' withdrawal powers may subject the trust to federal estate tax when the beneficiary passes away. The possibility of a taxable release of a Crummey right must be avoided at all costs when drafting a generation-skipping life insurance trust. At least two strategies are commonly employed to avoid taxable releases. First, the Crummey right may be limited to the five-and-five safe harbor, with the applicable exclusion amount being used to the extent that the transfer exceeds the greater of five percent of trust corpus, or $5,000. Second, the Crummey right can be structured as a hanging power.
ACCESSION #
6868470

 

Related Articles

  • ILITs and the GST Tax: How Do We Fund Premiums in 2010? Warshaw, Melvin A. // Trusts & Estates;Nov2010, Vol. 149 Issue 11, p41 

    The article discusses how to fund premiums for trustees of irrevocable life insurance trusts (ILITs) and people exempted from generation-skipping transfer (GST) tax in 2011. The GST tax applies to direct and indirect transfers made during the life, or as a result of the death, of a transferor...

  • What if grandma's uninsurable? Towers, Russell E. // Life Insurance Selling;Aug2013, Vol. 88 Issue 8, p26 

    The article presents a case study of a 85-year-old grandmother who is uninsurable and who owned a $10 million real estate property and three million dollars of state and/or federal estate taxes. To restore her lost asset value to her three grandchildren, it is suggested to develop a...

  • WHAT IS A CRUMMEY TRUST?  // National Underwriter / Life & Health Financial Services;Feb2012, Vol. 116 Issue 2, p54 

    The article discusses the nature of a Crummey Trust as a life insurance trust in the U.S.

  • Irrevocable Life Insurance Trusts. Sobczak, Carol A.; Robbins, Lawrence A. // Franchising World;Sep/Oct96, Vol. 28 Issue 5, p46 

    Discusses various aspects of irrevocable life insurance trust. How the trust works; Tax savings; Disadvantages; Persons who can act as trustees.

  • Irrevocable Trusts and Life Insurance: They Stand the Test of Time, Part II. Duff, Richard W. // Journal of Financial Planning;Aug1999, Vol. 12 Issue 7, p34 

    Part II. Provides information on irrevocable life insurance trusts (ILIT). Benefits of ILIT; Details on the creative legal drafting for the beneficiaries; Importance of planning and ILIT-owned policy on wealth preservation.

  • The Survivorship Spousal ILIT. Jones, Lawrence T. // Advisor Today;Feb2000, Vol. 95 Issue 2, p42 

    Describes an estate planning tool called irrevocable life insurance trust (ILIT). Reason for the popularity of a Survivorship ILIT; How to design and create a Survivorship Spousal ILIT; Goals that can be accomplished by a properly drafted Survivorship Spousal ILIT.

  • Avoiding Generation-Skipping Transfer Tax Traps. Goldberg, William J.; Watson, Mark T. // Journal of Financial Planning;Oct96, Vol. 9 Issue 5, p22 

    The article discusses pitfalls of Generation-Skipping Transfer Tax (GSTT). There are numerous planning difficulties involving GSTT. It is one of the most complicated and difficult-to-master areas of the tax law. Two provisions of GSTT that are commonly misunderstood are the exclusion for...

  • Crummey Trusts. Blau, Joel M.; Paprocki, Ronald J. // AUANews;Aug2007, Vol. 12 Issue 8, p12 

    The article offers information on the Crummey Trusts in the U.S. According to the author, asset protection remains a major concern for physicians. Many of them are looking at them as a creditor shielded gifting strategy for their children. A Crummey Trust refers to an irrevocable trust into...

  • Letter Ruling Permits Crummey Powers. Wagner, William J. // National Underwriter / Life & Health Financial Services;6/7/99, Vol. 103 Issue 23, p37 

    Features a letter ruling that would permit annual exclusions for contributions to trusts using Crummey withdrawal powers. Conditions made under this ruling; Explanation on the trusts created by the grantor; Contribution to the trust of each child or custodian.

Share

Read the Article

Courtesy of VIRGINIA BEACH PUBLIC LIBRARY AND SYSTEM

Sorry, but this item is not currently available from your library.

Try another library?
Sign out of this library

Other Topics