I. General Benefits
- Tax savings
- Control of assets after death
- Second to die policies typically provide guaranteed money for your heirs which is cheaper to obtain than single life premium policies.
II. Reasons to establish a Second to Die Life Insurance Trust
- Pay taxes upon death for assets outside of trust
- Provide guaranteed funding for disabled child
- Guarantee liquidity (so sentimental assets are not forced to be sold in a fire-sale)
III. 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 look back for tax purposes).
- The trustee of the trust then purchases the life insurance on the joint life expectancy of you and your spouse.
- A bank account must be set up for the trust.
- The premium should be paid into the trust’s bank account at least 45 days prior to the premium due date.
- Immediately after the trust’s bank account is funded, 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.)
- Thirty days later (this time frame various depending upon the trust document), the trustee can pay the premium.
- Upon the death of the survivor of you and your spouse, the insurance is paid to the trust.
- The trustee then pays out the money according to the terms of the trust.
IV. 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 now, they would have a potential tax liability of about $1,500,000.
- 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 revise 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 $1,000,000. This a savings of about $500,000.