Should you pay the policy premiums? Creating an irrevocable life insurance trust is an excellent way to ensure that the proceeds from a life insurance policy are not included in your taxable estate when you pass away. An irrevocable trust is one that is permanent and generally cannot be changed once it is implemented. For this reason, the administration of the trust begins right away, rather than upon your death as with a revocable living trust.
Irrevocable trusts used to hold life insurance policies are still responsible for paying the insurance premiums that are due. How is this accomplished? By making annual “gifts” to the trust that are tax free if handled properly.
Procedure for Paying the Premiums for Irrevocable Life Insurance Trust
In order to pay the life insurance premiums of an irrevocable life insurance trust (also known as an ILIT), the following procedure should be followed:
- Ensure that the trust has a tax identification number.
- Set up a checking account for the trust. This can be done at any bank, including the Anaheim branch of Bank of the West, Bank of America, Chase Bank, or another banking institution of your choosing.
- As the creator of the trust, you should write a check to the trustee to pay the policy premiums.
- The trustee should send out a letter to the beneficiaries of the trust advising them that a gift is being made to the trust. The gift is being made in order to pay the policy premiums. The letter should also instruct the beneficiaries that they have a certain period under the terms of the trust during which they can withdraw the funds that are attributed to their respective shares. This letter is known as a Crummey Letter. The letter has the effect of turning the gift from a “future” gift to a “present” gift for tax purposes—a very important step.
- The beneficiaries should not withdraw their share of the gift, because the gift is to be used to pay the life insurance premium. If they withdraw it, the policy may lapse due to a failure to pay the premiums.
- The trustee of the trust, after allowing the period for beneficiary withdrawal to lapse, should then pay the insurance premium using the trust’s funds.
If an irrevocable life insurance trust was created to hold a policy, you must pay the policy premiums. The procedure for doing so must be handled properly.Administering an irrevocable life insurance trust is a highly technical endeavor that should not be undertaken without the guidance of a knowledgeable professional. The attorneys at the Law Office of James F. Roberts & Associates APC are ready to answer your questions—send us an email today!