Ask the Experts!
The professionals at Advanced Underwriting Consultants (AUC) answer the tax and technical questions posed by producers. Here’s the question of the day.
Question: My married clients put together an irrevocable trust (ILIT) to own survivorship life insurance a few years ago. May the same trust own insurance that covers just one of their lives?
Answer: Probably yes, so long as the surviving spouse does not need access to the life insurance death benefit.
An attorney drafting an irrevocable trust designed to own survivorship insurance will generally include language that the trust is for the sole benefit of the insureds’ children. That is because if either insured under the survivorship policy is a beneficiary of the ILIT, then the policy’s death benefit may be included in the beneficiary-spouse’s taxable estate. Most couples who go to the trouble of drafting an ILIT would want to avoid estate tax inclusion of the policy’s death benefit.
An attorney drafting a policy designed to own a single-life policy may draft the ILIT differently. Many such trusts give the non-insured spouse a limited ability to make claim on the death benefit if needed for health, maintenance and support. A properly drafted ILIT of this type will keep the death benefit from being included in the taxable estate of either spouse.
A single-life policy can usually go into an ILIT drafted for survivorship insurance, because the lack of access by surviving spouse does not cause an estate tax problem. However, the surviving spouse would generally not have access to the policy’s cash values or death benefit.
Have a question for the professionals at AUC? Feel welcome to submit it by email. We may post your question and the answer as the question of the day.