The general benefits of a Second to Die Life Insurance Trust are: (1) tax savings, (2) the ability to control the timing of how your assets are distributed after your death, (3) it creates a creditor sheltered asset that practically guarantees that money will pass on to your heirs, and (4) second to die insurance produces a death benefit that is almost always cheaper than a life insurance policy on one person's life.
Reasons to Establish a Second to Die Life Insurance Trust
Some of the reasons to establish a Second to Die Life Insurance Trust include: (1) It can help pay estate and inheritances taxes upon your death for assets that are in your taxable estate, (2) it provides guaranteed funding for a disabled child, and (3) it provides liquidity so your heirs will not be forced to sell a business, sentimental asset or real estate in a fire-sale.
How does a Second to Die Life Insurance Trust Work?
The trust should be created prior to the purchase of the policy (otherwise there is a 3 year lookback for tax purposes). A bank account must be set up and then the trust is funded (usually with an amount equal to the premium plus the minimum amount the bank requires to maintain the account without charging fees.) Immediately after funding the trust, a beneficiary designation notice must be sent out. (In order to make gifts to the trust tax free, the beneficiaries of the trust must be allowed a window in which to withdraw the money. This is known as a Crummey trust.) Most attorneys allow for a 30 day window. After the window expires, the trustee of the trust then purchases the life insurance on the joint life expectancy of you and your spouse. Every year that the trust is funded (to pay the premium), a notice must be sent out. It is cumbersome, but it provides for terrific tax savings. Upon the death of you and your spouse, the insurance is paid to the trust.
Putting the Tax Savings into Real Dollars
Let's assume Harry and Winny have $7,000,000 in assets. They have two kids, one of whom has autism and needs permanent care. Even with proper planning, if Harry & Winny passed in 2011, they would have a potential federal estate tax liability of about $2,500,000. By setting up a life insurance trust, 100% of the money in trust can pass free of federal estate taxes as well as state estate and inheritance taxes. Additionally, the trust can be established to benefit Harry & Winny's autistic child in a way that he remains eligible for government benefits. To expand on the example above, if we properly move $1,000,000 of assets into this life insurance trust, leaving a taxable estate of $6,000,000, the potential tax liability is reduced to about $2,000,000, saving Harry and Winn's heirs about $500,000.
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