Estate PlanninG

Should Your Children Own Your Life Insurance Policy?

We are often asked why bother having an Irrevocable Life Insurance Trust ["ILIT"] in addition to a Revocable Living Trust? Would it not be easier to have the children own the life insurance policies on their parents thereby keeping it out of the parents' estate?

Yes, it is a viable option, but consider the administrative nightmare that would occur if the policy was jointly owned by all of the children. If a cash value advance is needed or a change is needed to be made to the policy, all of the children's signatures are needed.

Nowadays in our mobile society, families live in different cities or countries, which would add to the administrative nightmare.

Also, a minor or special needs child or special needs adult needs a guardian to be appointed to represent their interests.

Or the policy could be impacted by the estate of a deceased sibling and potentially be part of a protracted probate matter.

The ILIT is a good solution for these issues and more.

For example, it provides protection from creditors.

When a child owns the parents' life insurance policy and is sued, since the policy is not on the child's life, it is not exempt from a money judgment. But with the ILIT, the child's creditors cannot get to the life insurance policy.

There are gift taxes issues. If the parents pay the insurance proceeds directly to the insurance company, they would not qualify for the annual gift tax exclusion, which is currently $14,000 per person.

An ILIT with "Crummey" [1] withdrawal rights qualifies for the gift tax exclusion.

So depending on your unique situation, and to minimize potential estate tax liability, which is currently 40% of anything over $5.25 million, it is wise to review your situation with one of the qualified attorneys at Santaella Legal Group, APC.

[1] To be eligible for the gift tax exclusion under "Crummey", beneficiaries must be given notice of their right to withdraw money when a gift is made to the trust in the form of a life insurance premium payment. Also, the notice must be given within a reasonable time so the beneficiary can exercise that right - usually 30 days.