Tuesday, August 12, 2014
Kelly A. Moore (University of Toledo College of Law) recently published an article entitled, Rubik’s Cube and Tax Policy: Proposed Solutions For Puzzling Components of Estate Planning with Life Insurance, 33 Va. Tax Rev. 429-457 (2014). Provided below is the article’s abstract:
For taxpayers with wealth levels sufficient to trigger estate and gift tax concerns, the creation of irrevocable life insurance trusts (ILITs) is currently an irresistible estate planning option. If properly drafted, executed, and managed, the death proceeds from a life insurance policy can escape estate taxation upon the death of the insured and the insured's spouse, and the act of funding the trust may escape gift taxation. These tax benefits are obtained if the taxpayer is willing to incur the expense and expend the time associated with ILITs. Estate planners collect fees from (and insurance companies sell policies to) taxpayers to help them avail the benefits of an ILIT, but requiring the taxpayers to jump through the hoops in order to obtain the tax benefits furthers no policy objective. In essence, the taxpayer is presented with a choice: either subject the insurance on your life to transfer taxation or pay an estate planner to avoid imposition of the tax. This article proposes a limited exclusion for insurance proceeds from the gross estate, affording the taxpayers the benefit without the burden. Also, the article proposes a change in the provisions governing lapsing power of appointments in the case of ILITs, to remove the need for certain complex terms in any ILITs that may still be created.