Getting the Most Out of Your Life Insurance

If you own life insurance, congratulations. Many of us put off this critical element in our family’s financial planning, which may have devastating consequences on loved ones. You probably know why life insurance is so important. Young families need it to replace part of a breadwinner’s income. Mature Americans find it provides their heirs with a source of funds to pay estate taxes. Investors have discovered that innovative insurance products help them build cash value, tax deferred, for long-term goals like retirement. But remember, buying life insurance may be only part of the solution. Without proper planning, it can actually add to your estate tax bill.

The Mistake Thousands of Americans Make

Countless well-meaning parents, spouses and others make a simple but costly mistake when buying life insurance policies. They don’t think about who should own the policy. Unfortunately, that simple act could cost your heirs plenty. Here’s why.

Every American is entitled to an estate tax exclusion on the first part of his or her estate. You may need to take every precaution possible to reduce the value of your estate for estate tax purposes, and that includes life insurance planning.

While your beneficiaries will receive the death benefit income tax-free, the proceeds are not estate tax-free. Say, for example, that your home, retirement benefits, and other assets total $3.1 million. Your estate will pass to your heirs estate tax-free. But add in a life insurance policy with a death benefit increases the value of your estate over the estate tax exclusion. and subject to estate taxes. Estate taxes are levied at a higher rate after your exclusion, so your estate would owe a hefty estate tax.

The net result: your heirs will see part of your legacy lost needlessly to the government.

Preserving Your Legacy for Those You Love

There’s a simple solution that not only avoids the estate tax problem but also provides a host of other benefits. It’s called an Irrevocable Life Insurance Trust— or ILIT for short— and it allows you to protect your loved ones without adding to your estate taxes. Because your ILIT actually owns your policy, its death benefit won’t be taxable in your estate. Here’s how it works.

You set up your ILIT, and name a trustee other than yourself. Trustees are most often the beneficiaries of the trust or a financial advisor. (Obviously, if your beneficiaries are your minor children, you’ll want to name as trustee the person you’ve chosen to be their guardian or some other responsible adult.) The fact that you are not actively involved as a trustee should give you no cause for concern. Your trustee—or trustees—will have to precisely follow the instructions you provide in your trust documents.

After you create your trust, your trustee purchases a life insurance contract on your life with funds you provide. If you have an existing policy, you can assign ownership of it to the ILIT, but there are conditions imposed on these transactions that should be carefully considered before you do so. For instance, if you die within three years of the transfer, the life insurance contract will be included in your estate.

Annually, a taxpayer may give a pre-determined dollar amount (indexed for inflation) to another person gift tax-free. Married couples, therefore, can give a combined total of double that amount, gift tax-free to any one person. Other than this per-person rule, there’s no limit on the total amount you can give away.

By carefully following the IRS rules, you can employ this gift-tax exemption to make the policy’s premium payments. When you provide your trustee with the funds to pay your annual premium, your trustee must notify your beneficiaries in writing that a gift has been made in their names. Your beneficiaries will have the option of withdrawing these funds from your ILIT during a specified period, usually a minimum of 30 days. When they don’t exercise their option, your trustee will use the money to pay your insurance premium. This written notification of your gift to your beneficiaries is called the Crummey Letter, bearing the name of the taxpayer who won a court case against the IRS resulting in approval of this process. An annual Crummey Letter to your beneficiaries is an essential element of a successful ILIT.

Staying in Control—Today, Tomorrow and for Years to Come

Reducing your estate tax liability is a powerful incentive for considering the ILIT. But that’s just the beginning of the long list of benefits it provides.

The ILIT provides you control over how proceeds from your life insurance policy are spent. It is a mistake if you fail to control how the beneficiaries receive the policy’s proceeds. Even an adult with experience may find the large sum of money overwhelming. But when the beneficiaries are young adults who lack the maturity to handle such a windfall, the results can be devastating.

With the ILIT, you control who receives the proceeds, and how they receive it. Whatever distribution strategy makes most sense for you and your loved ones; the ILIT gives you the opportunity to put it into effect.

In many states, ILITs offer you the best—if not the only—way to protect the cash value of your policy from creditors. Over the years, your premiums and interest earnings can accumulate to considerable sums, making cash value policies a tantalizing target for creditors. They may be successful in such an action if you own the policy. When the policy is owned by the ILIT, however, it is generally out of your creditor’s reach.

A Short-Cut that Doesn’t Work

If you don’t want to implement an ILIT, you may be considering short cuts. One often-employed strategy is to make someone else the owner of your policy. It solves the estate-tax problem, but it also spawns a host of others, all involving your loss of control over the disposition of the policy. For example:

The policy’s owner can reassign it, pledge it as collateral, or expose it to threats from creditors. There’s nothing to keep the owner from spending your annual premiums on his or her own priorities, instead of keeping the policy in force. If the owner gets divorced, an ex-spouse can end up with a piece of your policy. You’ll have no option for controlling how your beneficiaries spend the policy’s proceeds.

© American Academy of Estate Planning Attorneys, Inc.

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Charity Begins at Home

Americans are some of the most generous givers on the face of the planet. They reach into their pockets and take out their checkbooks on behalf of others more often than any other industrialized nation. Nationally, charitable contributions make a thunderous plunk in the collection plate. In 2015, American corporations gave a total of $18.46 billion. Individuals followed suit, contributing to charity a total of $373.25 billion. Charitable Remainder Trust is one of the most popular ways Americans can donate to their favorite cause while doing well for themselves and their families.


Whether you are a budding philanthropist looking for the best way to contribute to society, or an investor looking for strategies to maximize income and tax breaks, the Charitable Remainder trust offers a powerful solution to your needs. It combines current charitable income tax deductions and future estate tax deductions with the opportunity to avoid capital gains tax on a highly appreciated asset. It then goes one step further to provide you with a new source of income.

A Charitable Remainder Trust delivers best results when benefactors have a highly appreciated asset—such as real estate or stocks—that provides little or no income.

Owning such an asset is a double-edged sword. You can’t sell the asset without experiencing the costly bite of state and federal capital gains taxes. On the other hand, if the asset is still in your estate when you die, it will increase your estate taxes.

Of course, you could donate the asset directly to charity and gain an immediate charitable income tax deduction. In one fell swoop, you’d reduce the value of your estate—and thus future estate taxes—as well as avoid capital gains taxes. But you’d miss out on an opportunity to maximize your income.

The Charitable Remainder Trust neatly overcomes these problems.

When you create your Charitable Remainder Trust, you transfer your highly appreciated asset to your trust. The asset is usually sold, with the proceeds used to buy income-producing investments. Then, each year for the rest of your life, you’ll receive income from your Charitable Remainder Trust. When you die, your designated charity will receive whatever remains in your trust. Hence the name: Charitable Remainder Trust.

The incentives for using the Charitable Remainder Trust include:

  • An immediate charitable income tax deduction based upon the fair market value of the asset given away (reduced by your received interest—or future income and subject to normal percentage limitations applied to itemized deductions);
  • An opportunity to put the full value of your appreciated asset to work for you and avoid the costly impact of capital gains taxes;
  • A new source of income;
  • And a charitable estate tax deduction on the full fair market value of the asset you’ve donated to the charity when you die.

It may sound like the Charitable Remainder Trust is a complex legal tool. But just the opposite is the case. Working with your estate planning attorney, you can set one up in fairly short order.

After deciding which charity you want to support, you then decide who will serve as trustee. The trustee can be you, a bank or trust company, or anyone else of your choosing. The trustee will assist in the valuation of the asset you contribute and will follow your precise directions laid down in your trust documents.

Next, you decide who will receive income from your Charitable Remainder Trust and for how long. This isn’t optional; it’s mandatory. According to the IRS, at least one beneficiary other than the charity must receive income each year. So, determine if you will be the only beneficiary, or if your spouse or children will receive income after you die. Lastly, you decide how you want to receive your income, and how much you will receive each year.


Your answers to these last questions will prove critical in determining exactly what type of Charitable Remainder Trust you choose. Which one will depend on your temperament as an investor?
For instance, conservative investors who want a predictable income year after year may prefer the Charitable Remainder Annuity Trust—or CRAT for short. You may make only one contribution to your CRAT, which will provide you a fixed annual income, regardless of the investment performance of your asset. Because your tax deductions and income are based on the value of the asset as of the day it was transferred to the trust, the CRAT is probably better suited to assets you suspect will lose value in the years ahead.

Regardless of the economic winds, your income is guaranteed. So, if your asset doesn’t earn enough to pay your annual income, the principal will be used to make up the difference. On the other hand, if the markets turn bullish and your asset outperforms your expectations, the surplus will be added to the principal.

With a CRAT, you will be paid an annual income equal to at least 5%, and no more than 50%, of the asset’s fair market value, determined on the day it was transferred to your trust. So, if you donated a stock portfolio valued at $250,000 on the day it was transferred to your Charitable Remainder Trust, your annual income would be a minimum of $12,500. There’s an upper limit to how much you can receive each year, but it isn’t as simply stated. It has to do with your lifespan (as well as the life spans of any other beneficiaries) and other factors. Your estate planning attorney will help you determine exactly how much your annual income from a CRAT may be each year.

The chief drawback of the CRAT is also its strength; it protects the donor against swings in the financial markets. In a stagnant or declining market, the donor comes out ahead. But in a strong market experiencing investment growth, it’s the charity that will ultimately benefit the most. That’s why donors who hold more bullish views on investing will prefer the Charitable Remainder Unitrust.

The Charitable Remainder Unitrust (CRUT) offers a couple of advantages over the CRAT. First, unlike the CRAT, you may make as many contributions as you like to your CRUT. And for the sake of determining annual income, it is the asset’s current fair market value—not its value on the date it was transferred to the trust—which is used in the calculations.

As for its income opportunities, the CRUT allows the benefactor to ride the financial markets and enjoy the investment performance of the trust assets. That means, of course, that in some years you may receive less, other years more. When lean years keep you from receiving your full due, a “make-up provision” can allow for additional income in future years to make up for the shortfall.

The CRUT requires that the donor receive a minimum income of 5% of the asset’s current fair market value, and not more than 50%. You can also opt to receive your chosen percentage or the trust’s net income, whichever is less.

Clearly, donors who want income from their charitable contribution and who don’t mind riding the winds of economic change will find plenty of appeal in the CRUT.


So far we’ve focused on the ample benefits that the Charitable Remainder Trust offers you. But what about your heirs? After all, you’ve given away a piece of their legacy in order to gain income and tax advantages for yourself today.
One frequently employed solution is the Irrevocable Life Insurance Trust. When used in concert with the Charitable Remainder Trust, it provides your heirs with an income-tax-free legacy equal to the full value of the asset you donate to charity. Here’s how it works.

After you establish your Irrevocable Life Insurance Trust, your trustee then purchases a life insurance policy on your life with your heirs as beneficiaries. Usually, the death benefit of this policy is equal to the value of the asset you’ve given away. The cost of the policy can be offset by income generated by your Charitable Remainder Trust or the charitable income tax deduction you receive. Upon your death, your heirs will receive an income-tax-free death benefit.

Why do it this way, rather than just owning the policy outright? Because the proceeds of a policy owned in your name at your death will be included in the value of your estate for estate tax purposes. Considering that estate taxes kick in at a 40% rate, life insurance policy could expose your estate to a sizable tax bite. (For more information, see the Academy report, The Irrevocable Life Insurance Trust.)

U.S. Senate Passes the Tax Overhaul Bill: U.S. Senate Passes the Tax Overhaul Bill: What’s Next and How to Plan for 2018

In the early hours of December 2nd, the U.S. US Senate passed the tax overhaul bill in a vote of 51-49 mostly along party lines.

Tax Planning in December 2017

In planning for the final tax bill to become effective for 2018, there are many opportunities to delay recognition of income now that may be subject to lower tax rates and accelerate payment of expenses that will qualify for the itemized deduction. These include:

  • Self-employed individuals should send invoices typically received in December in January.
  • Homeowners with mortgages in excess of $500,000 should consider paying any January 2018 mortgage payments now because such a payment includes December interest.
  • Taxpayers whose real estate taxes are in excess of $10,000 should consider prepay real estate taxes due in the first quarter before the end of this year.
  • Individuals who make estimated tax payments should pay fourth quarter state income tax before the end of 2017 rather than in January when due.Individuals who make large donations to charity should make any 2018 donations in 2017.
  • If you are moving shortly, try to pay all of your moving-related expenses before the end of 2017.
  • For businesses, if you own any rental properties, consider placing these properties into an LLC or other pass-through entity.

What to Expect Next

The next steps will be the House and Senate reconciling these differences and another full vote by each. Some provisions of the Senate bill are permanent, such as the change to the corporate tax rate; however, many are set to expire as early as the end of 2025.

Proposed Changes to the Tax Structure: How the Senate and the House Bills Compare

Individual Taxes

  • Income Tax Brackets for Individuals: The Senate bill has seven tax brackets: 10%, 12%, 22%, 24%, 32%, 35%, and 38.5%. The House includes only four: 12%, 25%, 35%, and 39.6%.  Personal Exemption: Both bills also eliminate the personal exemption.
  • Standard Deduction: The Senate bill increases it to $12,000 for individuals and the House increases it to $12,200.
  • Child Care Tax Credit: The Senate bill increases it to $2,000 per child (the second $1,000 will not be refundable) and provides a $500 credit for non- dependent children. The House bill increases it to $1600.
  • Itemized Deductions: Both bills allows for a property tax deduction up to $10,000. The Senate bill allows an interest deduction on mortgage debt up to $1,000,000, while the House version caps the loan limit at $500,000 for new mortgages. The Senate bill keeps the medical and dental expense deduction but temporarily lowers the 10% threshold to 7.5% for 2017 and 2018. The House bill eliminates it. The charitable donation deduction remains the same in both bills. The Senate bill eliminates some above the line deductions, such as moving expenses. However, it also increases the deduction for education expenses for teachers from $250 to $500. Both bills eliminate all other itemized deductions.
  • Alternative Minimum Tax (AMT): The Senate keeps the AMT with marginal increases to the threshold amounts, while the House eliminates it.
  • Estate, Gift and GST Tax: While the House bill repeals the estate tax, the Senate bill allows for an exemption amount up to $10,000,000 per person.
  • Estates and Trusts Income Tax Rate: The Senate increases the threshold at which Estates and Trusts reach the maximum tax rate from $7,500 to $12,500.
  • 529 Plan Expansion: The Senate bill allows up to $10,000 per year of federal savings accounts for educational purposes to be used for tuition at elementary and secondary schools and expenses for home-schooled students in addition to the post-secondary schools.
  • Sale of Principal Residence: The Senate bill increases the timing that the $250,000 ($500,000 for married couples) exclusion of gain on the sale of your principal residence can be applied to property used and owned to five out of the last eight years.

Business Taxes

  • Corporate Tax Rate: Both alter the corporate tax rate to 20%.
  • Pass-Through Business Income Tax Rate: The House bill drops the top income rate to 25% and 9% for businesses earning less than $75,000. The Senate bill includes a 23% income rate however the deduction would only be available to anyone in a service business earning less than $250,000 for an individual and $500,000 for a married couple. The new House proposal taxes pass through entities at a flat 25% and not at the property owner’s income bracket. In the Senate bill, landlords earning more than $700,000 annually would stay at a top rate of 38.5% unless the rental properties or a management company pays out significant w-2 wages. These provisions under both the House and Senate bills are not applicable to service professionals.
  • Multinational Corporations: US companies currently pay taxes on worldwide profits, no matter where such income is earned. The Senate proposal makes the US a territorial system, allowing companies to pay taxes on income earned only within the US. Both bills also include a repatriation tax ranging from 7 – 14% to encourage US businesses to bring assets back to the US.

Gibney is continuing to monitor these developments. For questions about the tax proposals or planning for 2018, please contact:

Gerald Dunworth

Meredith Mazzola

Gibney Attorneys Author Article on Executive Transfers to the United States

Gerald J. Dunworth, Meredith M. Mazzola  and Shai Dayan co-authored the article “Executive transfers to the United States: planning and avoiding pitfalls.” The article looks at the main considerations when an executive is transferred to the US, including global compensation packages, securing visas for executives and their spouses, tax planning, retirement benefits, housing costs, expat protection, permanent residence and repatriation. The article appears in Practical Law’s Private Client Guide.