TRUST AND ESTATE PLANNING WITH LIFE INSURANCE

Transcription

1 TRUST AND ESTATE PLANNING WITH LIFE INSURANCE First Run Broadcast: September 7, :00 p.m. E.T./12:00 p.m. C.T./11:00 a.m. M.T./10:00 a.m. P.T. (60 minutes) Life insurance trusts are platforms to transfer wealth among generations of a family on a taxfavored basis. These trusts also have the substantial benefit of providing liquidity, which is often lacking when family business interests, real estate or other illiquid property is transferred. The keys to the effectiveness of these trusts are choosing the right type of trust and insurance policy drafting the trust instrument s Crummey powers to permit the payment of premiums, and assigning a value and defining terms to avoid IRS scrutiny and challenge. When these inherent intricacies are not carefully planned and drafted, the trusts are easily subject to challenge and defeat. This program will provide you with a practical guide to structuring and drafting life insurance trusts. Planning with life insurance trusts to transfer wealth, fund death taxes, and provide liquidity Types of life insurance trusts, including single-life and second death trusts Intricacies and traps of drafting the underlying trust and choosing the right policy Understanding the relationship of Crummey powers to pay ongoing insurance premiums Generation Skipping planning for life insurance trusts Tradeoffs of financial and tax benefits versus control in insurance trusts Speakers: Daniel L. Daniels is a partner in the Greenwich, Connecticut office of Wiggin and Dana,, where his practice focuses on representing business owners, corporate executives and other wealthy individuals and their families. A Fellow of the American College of Trust and Estate Counsel, he is listed in The Best Lawyers in America, and has been named by Worth magazine as one of the Top 100 Lawyers in the United States representing affluent individuals. Mr. Daniels is co-author of a monthly column in Trusts and Estates magazine. Mr. Daniels received his A.B., summa cum laude, from Dartmouth College and received his J.D., with honors, from Harvard Law School.

2 VT Bar Association Continuing Legal Education Registration Form Please complete all of the requested information, print this application, and fax with credit info or mail it with payment to: Vermont Bar Association, PO Box 100, Montpelier, VT Fax: (802) PLEASE USE ONE REGISTRATION FORM PER PERSON. First Name Middle Initial Last Name Firm/Organization Address City State ZIP Code Phone # Fax # Address Trust & Estate Planning with Life Insurance Teleseminar September 7, :00PM 2:00PM 1.0 MCLE GENERAL CREDITS VBA Members $75 Non-VBA Members $115 NO REFUNDS AFTER August 31, 2017 PAYMENT METHOD: Check enclosed (made payable to Vermont Bar Association) Amount: Credit Card (American Express, Discover, Visa or Mastercard) Credit Card # Exp. Date Cardholder:

3 Vermont Bar Association CERTIFICATE OF ATTENDANCE Please note: This form is for your records in the event you are audited Sponsor: Vermont Bar Association Date: September 7, 2017 Seminar Title: Location: Credits: Program Minutes: Trust & Estate Planning with Life Insurance Teleseminar - LIVE 1.0 MCLE General Credit 60 General Luncheon addresses, business meetings, receptions are not to be included in the computation of credit. This form denotes full attendance. If you arrive late or leave prior to the program ending time, it is your responsibility to adjust CLE hours accordingly.

4 Estate Planning with Life Insurance Daniel L. Daniels Wiggin & Dana, - Greenwich, Connecticut (o) ddaniels@wiggin.com

5 What Is Life Insurance Defined: Contract in which insurance company ( Insurer ) promises to pay a specified amount ( Face Value ) to a designated person ( Beneficiary ) upon the death of the insured Wiggin and Dana 2

6 What Is Life Insurance (cont d) Owner must have an insurable interest in the insured (avoids gambling) Owner has following powers: Power to name or change beneficiary Right to assign policy Right to cash value (if any) 2015 Wiggin and Dana 3

7 Uses of Insurance In Estate Planning Income replacement for spouse and descendants Providing liquidity to pay estate taxes Providing liquidity to fund buy-sell agreements Equalizing distributions for: Business interests (where not all children are in the business) Second marriage Investment Vehicle Cash value for retirement or disability Employee benefit 2015 Wiggin and Dana 4

8 Types of Life Insurance Term Pure insurance, no cash value Increasing premiums or level premiums Whole Life Level premiums Death benefit guaranteed by Insurer Cash value (sometimes dividends) Universal Life Term insurance plus savings account Typically death benefit is not guaranteed New guaranteed universal life 2015 Wiggin and Dana 5

9 Types of Life Insurance (cont d) Variable Life Term insurance plus investment account Second to Die Split dollar Not a type of insurance An arrangement where premiums and death benefit are allocated between two parties Typically Employees (employee but sometimes family) 2015 Wiggin and Dana 6

10 Tax Consequences of Life Insurance Income tax consequences to policy owner Policy cash value grows tax-deferred Withdrawals up to basis Loans above basis Possible gain on surrender of policy Income tax consequences to Beneficiary Proceeds received income tax free Exception: transfer for value rule 2015 Wiggin and Dana 7

11 Tax Consequences of Life Insurance (cont d) Estate tax consequences Subject to estate tax if: Policy is payable to insured s estate Insured owned any incidents of ownership at death Ownership of existing policy transferred within three years of insured s death Not subject to estate tax if purchased by Trustee of properly structured life insurance trust 2015 Wiggin and Dana 8

12 Life Insurance Trusts Lifetime transfer of ownership Guaranteed growth on investment Well suited for annual exclusion trust Tax savings = 40% of insurance proceeds Single life or second-to-die 2015 Wiggin and Dana 9

13 Life Insurance Trusts: Tips, Tricks and Traps Defining the terms spouse and descendants Marital disposition savings clause for 3-year rule Trustee disabling clauses Trustee removal powers Grantor trust status Designing the Crummey clause GST issues To allocate or not to allocate GST exemption? Dealing with the automatic allocation rules Discretionary grant of general power of appointment 2015 Wiggin and Dana 10

14 11 Crummey v. Commissioner Adult and minor beneficiaries had a withdrawal right over an irrevocable trust in the amount of the annual exclusion Power would lapse at the end of the year if not exercised IRS challenged the applicability of the annual exclusion for the minors withdrawal rights since legal guardians had not been appointed to exercise the right on behalf of the minors Taxpayer prevailed

15 12 What is a Crummey Power? Presently exercisable withdrawal power over the principal of a trust Limited in amount Limited in time

16 13 Review of Best Practices: Notice Give notice to the beneficiaries so that the withdrawal right is not illusory Notice conveys to the beneficiary: That a gift has been made That the beneficiary has a withdrawal right over the gift

17 14 Review of Best Practices: Notice Knowledge versus written notice Powerholder needs to have a reasonable opportunity to exercise the withdrawal right Knowledge of the gift and its associated withdrawal right is likely sufficient, but the safer option is to provide written notice

18 15 Review of Best Practices: Notice Waiver of notice Based on the IRS reasonable opportunity position, a beneficiary should be able to waive notice of a withdrawal right o However, the IRS Office of the Chief Counsel has taken the position that waiver of notice defeats the present interest requirement, so it is probably best to continue providing notice

19 16 Review of Best Practices: Timing Length of withdrawal period What length of time gives a beneficiary a reasonable opportunity to exercise withdrawal power? Gifts made late in the year Implication for gift tax Implication for lapsed power

20 17 Drafting Considerations: What to Include Outline notice procedure Give donor the power to limit withdrawal right

21 18 Income Tax Consequences for the Crummey Powerholder Section 678 of the Code A person other than the grantor shall be treated as the owner of any portion of a trust with respect to which: (1) such person has a power exercisable solely by himself to vest the corpus or the income therefrom in himself, or (2) such person has previously partially released or otherwise modified such a power and after the release or modification retains such control as would, within the principles of sections 671 to 677, inclusive, subject to grantor of a trust to treatment as the owner thereof.

22 19 Income Tax Consequences for the Crummey Powerholder Even though the Crummey powerholder is treated as the owner of a proportionate share of the trust under Section 678, that ownership will be disregarded if the grantor holds a power under Sections over that same income If that is the case, the grantor will be taxed on all trust income

23 20 Estate Tax Consequences for the Crummey Powerholder Any property subject to a decedent s unlapsed power will be includible in her gross estate for estate tax purposes Creation of a retained interest for any taxable lapse Results in partial inclusion of the trust property in the decedent s gross estate

24 21 Gift Tax Consequences on the Crummey Powerholder Crummey power is a general power of appointment Letting the power lapse would be a transfer to the other beneficiaries of the trust Since the other beneficiaries have no withdrawal power of lapsed amount, it is a future interest gift, so it does not qualify for the annual exclusion

25 22 Gift Tax Consequences on the Crummey Powerholder: 5 and 5 Carve Out Section 2514(e) of the Code creates a carve-out: The lapse of a Crummey power is not deemed to be the release of a general power of appointment if the property subject to the power does not exceed the greater of: o $5,000 o 5% of the aggregate value of the trust corpus

26 23 Gift Tax Consequences on the Crummey Powerholder: Hanging Crummey Arises when the annual exclusion amount exceeds the 5 and 5 amount Withdrawal right is equal to the annual exclusion amount The amount that lapses each year is equal to the 5 and 5 amount Creates a hanging right of withdraw with respect to amounts in excess of the 5 and 5 amount

27 24 Gift Tax Consequences on the Crummey Powerholder: Hanging Crummey How hanging powers go away 5 and 5 amount will eventually be exhausted if the donor does not continue making gifts to the trust If the trust corpus continues to grow, 5% of its aggregate value will eventually wipe away the hanging power

28 25 Gift Tax Consequences on the Crummey Powerholder: Hanging Crummey Year Gift Withdrawal Right 5 and 5 Amount Hanging Power 2017 $75,000 $14,000 $5,000 $9, $75,000 $14,000 $7,500 $15, $75,000 $14,000 $11,250 $18, $75,000 $14,000 $15,000 $17, $75,000 $14,000 $18,750 $12, $75,000 $14,000 $22,500 $4, $75,000 $14,000 $26,250

29 26 Common Issues and Questions Fixing improperly drafted or administered Crummey trusts Gifts to multiple trusts Payment of life insurance premiums Transfers of illiquid assets

30 27 Generation Skipping Transfer Tax Considerations Section 2642: the GST annual exclusion only applies to transfers in trust if the trust is structured so that: Only the skip person for whom the transfer is made is permitted to receive distributions from the trust during his or her lifetime The trust will be includable in the skip person s estate if it does not terminate prior to the time her or she dies

31 28 Daniel L. Daniels Daniel L. Daniels is a partner in Wiggin and Dana's Private Client Services Department. He focuses his practice representing entrepreneurs, private equity and hedge fund founders, family offices, corporate executives and other wealthy individuals and their families. He is a Fellow of the American College of Trust and Estate Counsel and listed in the Best Lawyers in America. Dan received his B.A., summa cum laude from Dartmouth and his J.D. cum laude from Harvard Law School. ddaniels@wiggin.com

32 29 Wiggin and Dana Wiggin and Dana is a full-service law firm of approximately 140 lawyers with offices in Connecticut, New York, Philadelphia, Washington, DC and Palm Beach. Since its founding in 1934, the Firm has served the legal needs of entrepreneurs, corporate executives and other wealthy individuals and their families, as well as charitable and educational institutions, emerging companies, middle market business organizations and Fortune 500 corporations.