Benefits of a Second to Die Life Insurance Trust

I. General Benefits

1. Tax savings
2. Control of assets after death
3. 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

1. Pay taxes upon death for assets outside of trust
2. Provide guaranteed funding for disabled child
3. 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?

1. The trust should be created prior to the purchase of the policy (otherwise there is a 3 year look back for tax purposes).
2. The trustee of the trust then purchases the life insurance on the joint life expectancy of you and your spouse.
3. A bank account must be set up for the trust.
4. The premium should be paid into the trust’s bank account at least 45 days prior to the premium due date.
5. 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.)
6. Thirty days later (this time frame various depending upon the trust document), the trustee can pay the premium.
7. Upon the death of the survivor of you and your spouse, the insurance is paid to the trust.
8. The trustee then pays out the money according to the terms of the trust.

IV. Putting the Tax Savings into Real Dollars

1. 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.
2. 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.
3. 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.