Group term life insurance can be placed into an irrevocable life insurance trust, or ILIT. As with many other matters of trust law and estate planning, the way you do this and the reasons for doing it are complicated, but it can potentially net your estate significant tax savings if you die while your group term life insurance policy is in force.
Avoiding Estate Taxes
An irrevocable life insurance trust is a legal tool that lets you avoid estate tax on your life insurance proceeds. If you own a life insurance policy and you set it up to be payable to your spouse or your children, they're known as your beneficiaries. However, because you own the policy, it's considered a part of your estate and can be subject to estate tax. If you give your policy to an ILIT that you set up, it's no longer part of your estate, and your beneficiaries can inherit the money through the trust without estate tax.
Transferring Group Insurance
To put an insurance policy into an ILIT, you work with your insurer to give the ownership of the policy to the trust. Group insurance can make this process a bit more complicated, though. The creator of the group -- usually an employer -- might not allow transfers of ownership. If this is the case with your policy, you won't be able to transfer it to the trust. If you are able to transfer it, you will need to figure out a way to pay for the policy's premiums, if you have any. Your policy will need to be in your ILIT for at least three years for it to be sheltered from estate taxes. Otherwise, the Internal Revenue Service could treat the policy as if it hadn't been transferred into the ILIT.
Paying for the Group Insurance
If you don't have to pay for the insurance, the process is relatively simple. Every year, the cost of the premium that is paid for you is reported as a gift from you to your trust, because the premium is countable as your income. When you pay into your premiums, it's best to do so with your trust account, although the payments usually are taken out of your paycheck. Your payments are a gift to your ILITs, just as they are when your employer pays the premium.
A Crummey Issue
When you make a gift to an irrevocable trust, you have to send out a letter to the trust's beneficiaries letting them know that they have the right to pull out the money that you put in. These letters are called "Crummey letters" after a tax court case that established the procedure and involved the Rev. D. Clifford Crummey. With an ILIT, the trust has to send out Crummey letters for premium payments.
- Nolo: Transfer Your Life Insurance and Decrease Your Estate Tax
- PriceWaterhouseCoopers: Estate Planning -- A Trustee's Guide to the Irrevocable Life Insurance Trust
- Raymond James and Associates: Irrevocable Life Insurance Trust (ILIT)
- Sweeney, Mason, Wilson, and Bosomworth: Tax Free Gifts to Children and the Crummey Trust
- American Bar Association: Life Insurance and Life Insurance Trusts -- Basics and Beyond
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