Once your estate passes the estate-taxable threshold ($650,000 per single person, $1.3 million per married couple) common advice is to set up an irrevocable trust, make gifts to it and use these gifts to purchase life insurance to pay estate taxes. This serves the purpose of removing the life insurance policy from your estate and keeping the death benefit free of estate taxes. The common misconception in estate planning is that if you give up ownership, you also give up control. That's not the case and I find that even some estate planning attorneys misunderstands this issue.
There are several ways to place assets in an irrevocable trust and still retain access to the funds if you need them. For example, in a private letter ruling, the IRS permitted a taxpayer to loan money to the irrevocable trust and agreed that such loans would not cause the death benefit to be included in his estate. (This also allowed the taxpayer to have the trust repay him if needed and thereby gain access to cash values in the life policy.)
In other cases, attorneys are drafting irrevocable trusts that simply allow the trustee to make loans from the irrevocable trust. In such a case, the life policy could be on the husband and the trust makes loans to the wife (if cash is ever needed).
So don't confuse ownership and control. Good estate planning removes assets from your estate (ownership) but still gives you access and indirect authority over the assets (control).
We are not estate attorneys, but we can help you set an estate plan that will keep the most control for you and your heirs and minimize any distributions that you do not want to make (such as taxes). Because this type of advice is situational rather than general, please call xxx-xxx-xxxx to set an appointment.
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