| ||Drafting Suggestions for Irrevocable Life Insurance Trusts *|
Robert S. Balter
Robert S. Balter, J.D., LL.M. (Taxation) is Director of Business & Estate Analysis with Karr Barth Associates, Inc., in Bala Cynwyd, PA, and is a registered representative with AXA Advisors, LLC, New York City. Previously, Mr. Balter was a Tax Law Specialist with the Internal Revenue Service, Chief Counsel's Office in Washington, DC., and was Associate General Counsel to the Mid-Atlantic Companies in Moorestown, NJ. Mr. Balter holds an LL.M. in taxation from Temple University Law School and graduated from the University of Pennsylvania and the University of Pittsburgh Law School. The author gratefully acknowledges the thoughtful commentary and review of this article provided by Howard M. Zaritsky, J.D., LL.M., Rapidan, VA; Jonathan G. Blattmachr, Esquire, Milbank, Tweed, Hadley & McCloy, L.L.P., New York, NY; Dennis J. Fitzpatrick, CLU, ChFC, Director of Advanced Marketing, Northwestern Mutual Life Insurance, Milwaukee, WI. The opinions expressed, however, as well as all responsibilities for errors, remain solely the author's.
This article presents practical and legal analyses of many provisions commonly used in irrevocable life insurance trusts, focusing on the consequences of dispositive provisions. This article discusses income, estate, gift, and generation skipping transfer tax planning, as well as asset protection concerns, principally in the context of a trust holding insurance covering the life of an individual married person.
To set the context and facilitate the discussion, one must assume certain basic planning facts. First, assume the client is married and insurable. Second, the decision to use a trust, as opposed to having individuals in the next generation, a partnership, or other entity hold the insurance, has been made and is not being reviewed. Third, the relationship between the insured and his or her spouse is not a matter of current concern, although no one can foretell the future. Fourth, the insurance is to cover the life of one individual. Fifth, although the surviving spouse will likely be the beneficiary of a significant testamentary marital deduction trust as well, it is desirable to allow the him or her to benefit from the life insurance proceeds. Sixth, one of the client's objectives is to prevent the imposition of income, estate, gift, and generation-skipping transfer taxation of the insurance death benefits. Finally, another client objective is to prevent creditors from having access to the beneficiaries' death benefits, even though neither the beneficiaries nor the insured-settlor has any current creditors out of the ordinary.
In this context, the discussion is divided into the following analytical parts: (1) provisions effective prior to the trust division date, (2) provisions concerning the trust division date, and (3) provisions effective after the trust division date.
*Adapted from an article published in the May 2001 issue of the Journal of Financial Service Professionals, Vol. 55, No. 3. Included here with permission from the Society of Financial Service Professionals, 270 S. Bryn Mawr Avenue, Bryn Mawr, PA 19010.