Donald M. Thompson - Wills, Trusts, and Estate Planning


Life Insurance Trusts

These are trusts designed to own or be the beneficiary of life insurance or both. They usually contain certain technical provisions governing the trustee's powers concerning life insurance. One kind is revocable, designed merely to provide for estate tax savings by using the marital deduction and credit against tax and to provide for management of the insurance funds by someone other than the beneficiaries. The insured can retain the right to change beneficiaries and to borrow against the policy if it has cash value. The insured's will very often pours over all other assets to this trust when the insured dies.

The other kind is an irrevocable life insurance trust. The insured gives up all rights over the policy and transfers it to a trust of which he or she is not trustee or a beneficiary. The object is usually to remove the proceeds from the taxable estate of the insured and sometimes the surviving spouse as well and to provide for trustee management of the proceeds. Special provisions of a technical nature called Crummey powers can be used to allow yearly gifts to the trust up to $5000 per trust beneficiary to be made free of gift tax to pay premiums on the policy. The gift tax is avoided on transfer of an existing policy into the trust by borrowing against the policy's cash value of the policy. Frequently a new policy is purchased and transferred to the trust so there is no gift tax problem on creation of the trust.

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Donald M. Thompson * 55 W. Monroe #3950; Chicago, IL 60603
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