Irrevocable Life Insurance Trusts and Estate Planning

• Author: Seymour Goldberg
• Profession: Senior partner in the law firm of Goldberg & Goldberg, P.C., in Woodbury, New York
• Pages: 59-60

Many individuals use irrevocable life insurance trusts for estate tax rea-

sons. If the irrevocable trust is drafted properly, it can possibly be used as

a vehicle to provide a source of funding to pay the estate tax liability on

the death of the insured. If the insured is married, then the irrevocable

life insurance trust can provide for the liquidity on the second to die of

the insured (husband and wife). That happens when the life insurance

policy is a second-to-die policy.

According to the IRS rules, the trustee of the irrevocable trust cannot

be obligated to pay the estate tax liability of the grantor or grantors of the

irrevocable trust if a second-to-die policy is involved. If that provision is

accidently included in the irrevocable trust document, then the IRS will

include the policy proceeds in the estate of the insured or the estate of the

second to die of the insureds, as the case may be, for estate tax purposes.

The irrevocable trust document can permit (not mandate) that the

trustee of the irrevocable trust may purchase assets from the estate of

the grantor or the estate of the second to die of the grantors, as the case

may be, at fair market value. The irrevocable trust document can also

permit the trustee of the irrevocable trust to lend money to the estate of

the grantor or the estate of the second to die of the grantors, as the case

may be, provided that the loan is adequately secured and a reasonable

rate of interest is payable on the loan. The terms of the loan must be at

arm’s length and the trustee must be sure that the trust beneciaries are

adequately protected.

If the trustee is careless and does not protect the trust beneciaries prop-

erly, then the trustee faces liability problems with the trust beneciaries.

As the federal estate tax exemption increases as a result of the ina-

tion adjustment, then the need for the irrevocable life insurance trust for

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IRREVOCABLE LIFE INSURANCE

TRUSTS AND ESTATE PLANNING