Insurance Trusts and GST – A Primer

• Published in: Estate Planning 2021-11, Vol.48 (11), p.17-21
• Main Authors: Liss, Stephen, McLaughlin, Tracy L
• Format: Article
• Language: English
• Subjects: Beneficiaries; Crummey trusts; Estate planning; Estate taxes; Generations; Gift taxes; Insurance policies; Life insurance trusts; Tax rates; Transfer taxes
• ISSN: 0094-1794

[...]a grandchild is treated as only one generation below those grandparents, and therefore not a skip person. When a direct skip occurs the transferor, if an individual, or the trustee, if a trust, is responsible.10 Section 2515 treats any such payment of GST tax on a direct skip by an individual as an additional gift, and that in turn is further subject to GST tax.11 Upon a taxable distribution, the recipient is responsible,12 and, in the case of a taxable termination, the trustee is responsible.13 Lifetime GST Exemption and the GST Annual Exclusion In 2021, each transferor may allocate up to $11,700,000 (indexed for inflation) in GST exemption, reduced by any amounts already allocated.14 Unlike the federal estate and gift tax exemption, this amount is not portable and may not be used by a surviving spouse. [...]an individual's GST exemption not used during life or applied at death will be lost. [...]40% of any distribution to a skip person from that trust would be subject to a 40% GST tax, resulting in an effective rate of 16%. Contribution of an Existing Insurance Policy to the ILIT A decedent's gross estate includes the value of life insurance on the life of the decedent over which the decedent possessed incidents of ownership at his death, whether exercisable alone or in conjunction with any other person.24 An incident of ownership means the insured has an economic benefit in the policy, such as the right to surrender or cancel the property, to change the beneficiary, or to pledge the policy for a loan.25 Further, if the transferor dies within three years of giving up such incidents of ownership, the value of the proceeds from the insurance policy are included in his or her estate.26 As a result, estate planners often advise clients to establish an ILIT and then have the trustee obtain a new insurance policy on the life of the grantor.