estate as beneficiary of any life insurance policies insuring your life, may also subject those liquid proceeds to a substantial federal estate tax extraction (again, upwards to the current top 55% tax rate).

(c) Diverted into a lawsuit-protection insurance trust:

Paying the proceeds to a life insurance trust has several advantages:

First, your family will not have to pay estate (nor income) tax on the proceeds if the policy was owned by the trust for more than three (3) years before your death and the trust instrument itself was properly drafted and administered during your lifetime. Establishment of a life insurance trust during your lifetime also permits your family to avoid any inconvenience and expense that would otherwise be associated with the policy proceeds passing through the probate administration process.

This three-year waiting period may be avoided on a purchase of new life insurance policies, if additional liquidity for your family is needed.  To accomplish this avoidance of the 3-year waiting period, the application for a new policy, the premium payment, and the policy itself must all be made in the name of the trust, rather than your name individually or the name of your spouse. Therefore, if you are interested in the possibility of acquiring new or additional insurance coverage on you life, in order to avoid the three-year waiting period, do not sign any documents or application forms prior to discussing this matter further with either us or your financial advisor.

The irrevocable life insurance trust has an additional advantage in that it requires minimum administration, usually only once a year, just before the premium due date.  Since the trust is primarily unfunded prior to your death, there are generally no tax returns to be filed for the trust.  Your accountant (and you) will appreciate that feature.  However, you need to make annual administrative announcements for the cash contributions by you to the trust for purposes of making premium payments on the policies owned by the trust.  We or your financial advisor will be happy to assist in this matter to minimize any administrative headaches for each of you relating to these trusts.

As required by current IRS Regulations, each beneficiary of the Trust must be notified in writing of each deposit made by you to the Trust's checking account for payment of insurance premiums.  By properly giving notice, and retaining file copies of these Notification letters, each contribution of premium dollars by you to the Trust checking account should qualify for the current annual gift tax exemption amount of $13,500.00 (actually $14k, but should not write full check for $14k or then Christmas and birthday presents to that person become taxable gifts).

6.         Buy-Sell Agreement (for business owners)

The most common device used for transferring ownership of a business on the death of a partner or shareholder is the buy-sell agreement.  Such contract hopefully will facilitate the business continuing to run smoothly with the same people in charge, minus one, provided proper business succession planning has been put into place along with the buy-sell agreement.

Buy-sell agreements typically provide that at the owner’s death, his or her interest in the business will be purchased by the remaining partners or shareholders, leaving the deceased partner’s family with the proceeds of the sale.  Life insurance is often a useful “funding vehicle” to finance these arrangements.

There are three (3) principal ways to structure such agreements.  An entity purchase allows the business itself to take out a policy on the life of each owner and use the life insurance proceeds to purchase the ownership interests of the deceased partner.  However, if the business is a “C” corporation there are significant income tax disadvantages with such policy ownership by the corporate entity. 

With a cross-purchase, the co-owners personally take out insurance on each other and each surviving business partner purchases his or her pro rata share of the deceased partner’s interest. Since multiple polices become necessary with the cross-purchase arrangement, an entity purchase is simpler; but, as noted above the cross-purchase may be the preferred, tax-advantageous-arrangement if the business is operating as a “C” corporation.

Also, please keep in mind that if the company is the owner of the current coverage, you must exercise extreme caution in getting an existing policy out of the company; otherwise, you may inadvertently trigger the “transfer for value” rules and cause the entire proceeds to become subject to the income tax!

Alternatively, a trust-owned policy insuring the lives of all the owners of the business can be used to address these problems.  Such policy would be owned by, and the policy proceeds paid into, the trust upon the first death of any owner (thereby only necessitating a single policy if the business is owned by two individuals, as what is generally referred to as a "first-to-die" policy).  Obviously, if there are more than two owners in the business, then such policy would carry a rider to continue in force for a subsequent payment upon the second death of the remaining owners.