Insurance Trust

Most life insurance should be
held in an insurance trust to keep it out of your taxable estate, protect the
proceeds from creditors and divorce, provide management, save state income
taxes and more. With all these tremendous benefits, your trustees should be
paying careful attention to monitoring and administering your trust. But few
do. Here’s a check list of steps to help you through the muck. You need to
address each item for each trust you have.

Step 1: Be sure everyone has
signed the trust: you as grantor (person forming and funding the trust) and the
trustees. Too often you and perhaps one trustee sign at the lawyer’s office and
the other trustee doesn’t sign (or fails to get his signature witnessed or
notarized).

Step 2: The Trustees must
complete and sign (in their capacity as trustees) all applications and forms
from your insurance company. The application must list the correct name of the
trust and trustees.

Step 3: Obtain a tax
identification number (TIN) for the trust. You can get this online at
www.irs.gov/businesses/listssmall/article/0,,id=98230,00.html. Write the TIN on
the front page of the trust. Everyone you work with will need it (bank,
insurance company, etc.).

Step 4: Your trustees should
take a signed copy of your trust (with the TIN on it) to a bank and open a
trust bank account. Deposit a nominal amount to get the account started
(usually an amount is listed on the last page or schedule of the trust –
deposit that amount). It should be a check written by you (the grantor) to the
exact name of the trust. If a premium is due soon, you write a separate check
for an amount sufficient to cover those costs. The best account is usually a
non-interest bearing free checking account. No interest, no tax problems. No
charges, less headaches.

Step 5: Be sure the insurance
applied for is issued in the name of the trust. If existing insurance is being
transferred to the trust, contact your insurance agent and request a written
estimate of the value of the insurance policies being transferred, the balance
of any loans outstanding, the amount of the policy which can be borrowed
against, and the documents to complete the transfer. The value of the policies
is important so you can plan to avoid any gift tax cost on making the transfer.
This is usually complicated and should be worked out at a meeting with your
estate planner or CPA, and your insurance agent. You have to survive 3 years
after the transfer to get the insurance out of your estate so complete the
transfer to get the clock ticking.

Step 6: Your insurance trust
probably includes a demand or Crummey power to qualify your gifts to the trust
for the annual $12,000 gift tax exclusion. Each time a gift is received by the
Trust, the trustees should send the beneficiaries a formal notice of the amount
of gifts made in total and for the credit of that beneficiary. The
beneficiaries must sign and return these notices for the trustee to hold in the
trust files. This is like to the commercials on TV caution you not to try it at
home. Have your estate planner, CPA, or insurance agent, walk you through the
first ones. The calculations are not obvious and the entire concept defies
logic. Even if the estate tax is repealed, or won’t affect you, you need to
continue these procedures if they are in your trust.

Step 7: Your trustees should
pay for the insurance premiums using checks on the trust bank account made
payable to the insurance company. Note the policy number and trust TIN on the
check. If you have more than one trustee, ask the lawyer who drafted the trust
if all trustees need to sign all checks and deposits. Some trusts permit one
trustee to handle limited administrative tasks alone, many don’t.

Step 8: Ask your CPA if you
need to file a tax return. Many insurance trusts are “grantor trusts”
(meaning the income is reported on your return) but the trust might still file
its own Form 1041 indicating that.

Step 9: Meet annually with at
least one of your advisers to be sure that you are properly caring for your
trust. Your adviser should review trust bank accounts to be sure they are set
up properly, insurance policies to be sure they are in the trust, Crummey
notices to be sure they are done correctly, monitor your plan to evaluate the
appropriateness of the coverage and plan, and periodically get a review of the
insurance policy (in force illustration), review trust administration issues,
etc.

Failing to follow up on the
above, or not monitoring your trust, could jeopardize any or all of the
significant benefits.