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Irrevocable Life Insurance Trust

July 24, 2014

The following are the steps that should be followed to set up an irrevocable life insurance trust and to remove all incidents of ownership from an insured.

    1. Create an Irrevocable Life Insurance Trust (“ILIT”) to assume outright ownership and all incidents of ownership of all the policies.  This is a legal document that needs to be prepared by an attorney.
    2. You will need to name a trustee and alternate trustee to administer over the trust. It is not suggested you name people that can benefit from the trust’s assets.
    3. The trust will become the sole beneficiary of any life insurance policies owned by the trust.
    4. You will need to name beneficiaries to receive any income earned by the trust and/or principal in the trust.  An example is for your spouse to be the income beneficiary and your children, principal beneficiaries.  The trust can also state how long the income payments will continue and under what circumstances.
    5. The trustee should be given the right to invade principal for ascertainable standards of health and welfare of your spouse, children, or other beneficiaries.
    6. You can also give the trustee the right to invade principal and distribute funds to the beneficiaries for any reason they feel necessary and appropriate under the then current situations.
    7. You can also give the trustee the right to distribute income, or principal, disproportionately based on need, or individual circumstances as they arise.
    8. The trust can provide that the children and/or other beneficiaries will receive a pro rata share of the total trust assets when they reach a certain age or stage in their lives.  An example is 1/3 upon reaching age 25, 1/2 of the remaining balance upon attaining age 30, and the balance at age 35. Alternatively, the trust can provide that a portion be distributed upon attaining significant events in their lives such as marriage, receiving certain college or university degrees or honorable discharge from the armed forces.
    9. The transfer of all incidents of ownership of existing policies to the trust might result in the creation of a taxable gift.  To the extent thereof, a gift tax return will have to be filed and either a gift tax paid or the lifetime exemption applied.  It can also be arranged for the gifts to be done in stages.
    10. To the extent premiums would be due, annual gifts could be made to the trust.  If annual gifts are made, then “Crummey Letters” (speak to your accountant or attorney when establishing the trust) should be prepared to permit the allowance of annual gift tax exclusions for the premiums so that those amounts will not be considered as taxable gifts.
    11. If grandchildren can become recipients of the life insurance, there will be generation skipping transfer issues which are not covered in here.  You are cautioned to seek competent advice in that regard.
    12. If the insured dies within three years of moving an existing policy to the trust, the proceeds would still be includible in their estate.  This applies to presently existing policies either under direct ownership or a company’s.
    13. If new or additional insurance is purchased, it should be acquired directly by the trust.  The three-year rule does not apply to policies purchased directly by the trust.
    14. Irrevocable life insurance trust assets and insurance proceeds are excluded from estates and estate taxation.  Proceeds received after death that include interest or other ordinary income will be subject to income tax by the recipient.
    15. If the trust has income (such as interest, dividends or capital gains) during the lifetime of the grantor, the income will be taxed on the grantor’s individual income tax return.  This is subject to “grantor trust” rules.
    16. The trust is a legal entity under the law.  However during the lifetime of the grantor, no separate taxpayer identification number needs to be applied for – the grantor’s Social Security number can be used and no separate tax returns need to be filed by the trust.  After the death of the grantor, separate identification numbers have to be obtained and tax returns filed.
    17. Note that life insurance owned by an insured where their divorced spouse is a beneficiary will be included in the insured’s estate while the divorced spouse receives all or some of the death benefit (and the insured’s estate will be subject to pay the estate tax on those funds).  Irrevocable life insurance trusts owning the policies avoid these types of problems.  Also a will’s apportionment clause can possibly reduce some of the taxes paid by the estate.

Reprinted from Getting Your Affairs in Order by Edward Mendlowitz.  Available for sale at and in print and e-book editions.

Basics of Establishing a Trust

July 22, 2014

Trusts are not necessary in most estate plans, but when used properly, they provide significant benefits.  Trusts can provide a means of distributing income and principal in an orderly, managed way, offer a degree of asset protection, designate groups or classes of beneficiaries and can force the use of various professionals.

Definition of a Trust

A trust is an entity established by a person called a grantor, for the benefit of others, called beneficiaries, that is controlled by a third person called a trustee.  The beneficiaries can consist of one group that receives the current income, a fixed dollar amount or percentage of assets and another group who will receive the remaining trust principal at a later time.  The income and principal beneficiaries can also be the same people.  The beneficiaries can also be people not living yet, such as children born after the trust is established.  There is wide flexibility and great leeway in determining who the beneficiaries are and the distribution terms, but once established, they cannot easily be changed, if at all.

Trustees and Their Powers

Trustees can be individuals, or a bank or trust company.  There can be one or multiple trustees.  Trustees have very broad powers to not only control the distributions in amount and timing and sometimes to whom, but also how to invest the assets.  All powers given to trustees are explained and detailed in the trust document and if not, there cannot be done with certain narrow exceptions.

How Trusts Are Established

Trusts can either be established by someone that is living in a separate document (called inter vivos trusts) or through a will (called testamentary trusts).  Trusts are formed under the laws of the jurisdiction where they are set up.  Some states and countries are particularly useful in creating trusts for specific purposes.  When establishing a trust it is necessary to use an attorney familiar with the different jurisdictions and purposes for that particular trust.  Trusts set up in a will have no meaning or effect until the testator dies, and the will is probated.

Irrevocable Trusts

Trusts that cannot be altered with an independent trustee where absolute title to the assets is transferred is irrevocable. Inter vivos transfers are subject to gift tax.

Revocable or Living Trusts

Trusts where the grantor can make changes whenever they want for any reason are revocable and are sometimes referred to as living trusts.  Transfers to a living trust are not subject to gift taxes and are disregarded for income and estate tax purposes. Living trusts become irrevocable upon death of the grantor and are occasionally used as substitute wills, but that should not negate preparing a will, and can bypass the probate process.  To serve the purpose for which they are created, assets must be legally transferred to the trust.

Grantor Trusts

This is a type of trust that is irrevocable but where the grantor has certain rights as defined in Internal Revenue Code (“IRC”) Sections 671 – 679.  Because of these rights the trust’s income is reported on the grantor’s individual income tax return and the grantor pays the income tax instead of the trust or beneficiaries regardless of whether he receives any income or distributions.  Sometimes grantor trusts are referred to as defective trusts because they violate the IRC §671-679 tax laws, and not for any other reason.

Trust Taxation

Irrevocable trusts that are not grantor trusts are taxed on undistributed income at a trust tax rate schedule using Form 1041.  Trusts get a deduction for distributions to beneficiaries who will report the income on their individual income tax returns.  Filing requirements are based on the trust’s gross and taxable income.  Living trusts and grantor trusts are not required to file tax returns so do not need to obtain taxpayer identification numbers– the grantor’s Social Security number is used and the transactions are reported on the grantor’s individual income tax return.


Be aware that costs will be incurred in establishing, operating and maintaining a trust, and for government compliance and tax return filing.


The above is a brief summary of what trusts are and how they work.  If you believe a trust might help you or should be part of your estate plan, you should consult with a CPA or attorney that is expert in such matters.

Forms of Ownership

July 17, 2014

Following, is a listing of some types of ownership.

Joint Tenancy or Joint Tenancy With Rights of Survivorship

This is a form of joint ownership where all joint owners have an undivided interest in the entire property.  If a joint owner dies, the other becomes the complete owner of the property.

Tenancy by the Entirety

Form of ownership limited to a husband and wife in which each has an undivided interest in the entire property.  The survivor ends up with the entire property.

Tenancy in Common

Form of joint ownership where each party owns a specified share of the property.  There is no right of survivorship.  When one owner dies, their share goes to their estate (or a beneficiary that is designated), not to the other owner.

Community Property

This is limited to married couples in the states of Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington and Wisconsin.  The assets include all property acquired during the marriage while they are domiciled in a community property state, except property received as a gift or inheritance.  Each spouse is deemed to own half of the property.

Custodian for a Minor

Under state Uniform Gifts (or Transfers) to Minor Acts (“UGMA”) an adult person can hold title to property for the benefit of a minor.  Upon the minor reaching majority, the funds must be transferred to the minor’s name.  Assets held under UGMA use the social security number of the minor and the income is reported on the minor’s tax return.


Assets held in a trust are “owned” by the trustee for the benefit of the beneficiaries as designed in the trust agreement.  There are many different types of trusts and many different reasons why they are formed.  Some trusts pay taxes and transfers to some trusts are subject to gift tax.  Trusts can be formed by a person during their lifetime or upon their death per instructions in a will.

Totten Trust

This is not actually a trust but a designation on an account at a financial institution where someone other than the depositor or account owner is named as a beneficiary in the event of the owner’s death.  The designation would have the owner’s name with “in trust for ___________ [beneficiary’s name]” after it.  Upon the owner’s death, title immediately transfers to the “in trust for” person.

Power of Attorney

This is where someone is granted control over a bank or brokerage account, but does not have any ownership or inheritance rights.  The power terminates at death.  This is usually used if there is incapacity and the funds need to be accessed.  The power can be limited to a single account or to every asset the person granting the power has.

These methods involve serious tax, estate and financial planning issues and should not be done without competent professional advice.  All documents should be prepared by an attorney experienced in such matters.

Some of this material originally appeared in Getting Your Affairs in Order by Edward Mendlowitz, CPA ©2012.  Available for sale at and .

Casey Stengel and Mickey Mantle

July 15, 2014

Tonight is Baseball’s All Star Game and it got me thinking about some of the baseball greats I have seen.  And, I thought of Casey Stengel and Mickey Mantle appearing before a Congressional Committee on July 9, 1958, that was investigating the need for baseball antirust legislation.  Here is an excerpt from their testimony:


Senator Langer: I want to know whether you intend to keep on monopolizing the world’s championship in New York City?


Mr. Stengel: Well, I will tell you.  I got a little concern yesterday in the first three innings when I saw the three players I had gotten rid of, and I said when I lost nine what am I going to do and when I had a couple of my players I thought so great of that did not do so good up to the sixth inning I was more confused but I finally had to go and call on a young man in Baltimore that we don’t own and the Yankees don’t own him, and he is doing pretty good, and I would actually have to tell you that I think we are more the Greta Garbo type now from success.


We are being hated, I mean, from the ownership and all, we are being hated.  Every sport that gets too great or one individual – but if we made 27 cents and it pays to have a winner at home, why would you have a good winner in your own park if you were an owner?


That is the result of baseball.  An owner gets most of the money at home and it is up to him and his staff to do better or they ought to be discharged.


Senator Kefauver: Thank you very much, Mr. Stengel.  We appreciate your presence here.  Mr. Mickey Mantle, will you come around? . . . Mr. Mantle, do you have any observations – with reference to the applicability of the antitrust laws to baseball?


Mr. Mantle: My views are just about the same as Casey’s.


This was abstracted from Baseball’s Greatest Quotations by Compiled by Paul Dickson © 1991 by Paul Dickson

How to Make a Killing in the Stock Market

July 10, 2014

Buy one stock and pray.


Dividing your funds into two stocks starts you on the road to diversification and will reduce your risk, but it also reduces your upside and potential to make a killing.  Buying five stocks puts you in the situation of assuming the market risk and returns similar to the entire group the five stocks were chosen from.  Forget about making a killing!


If your purpose is to make a killing, buy the one stock.  If your purpose in investing is to build your wealth to secure your financial future, then you need to diversify your portfolio in asset categories and within each category.


Decide what is best for you, get the best advice you can and then implement your plan.

What Joseph P. Kennedy and Bernard Baruch Had in Common

July 8, 2014

Joseph P. Kennedy was the father of a United States President and two Senators.  Bernard M. Baruch was an advisor to eight Presidents.  They had disparate backgrounds and each obtained notoriety in their own right.  They both made the bulk of their fortunes as stock market speculators.


One thing they had in common was that they liquidated their stock investments before the 1929 stock market crash.  Had they not gotten out when they did, it is possible we would have never heard any more about them.


They made enough and wanted the security that the wealth they amassed could provide and did not feel the gains from further risk taking would benefit them as much as potential losses could hurt them.


Assessing risk and rewards is not too hard.  You just have to be realistic about your needs and goals.  At some point you either have enough or are on track to achieve your goals; or you are off base.  If on track, then gains from excessive risk won’t substantially add to your future well-being.  If not on track, then perhaps greater risk can get you closer and should be considered – you can also consider making life style changes now that can help you get closer to your goals.


Investing is a means to accomplish the goal of being able to have a sufficient cash flow at some point to live securely.  Investing is not a hobby, dalliance, game or lighthearted activity.  It is a serious undertaking and wrong moves, excessive risk, or a failure to recognize the reality of your situation can be ruinous and detrimental to your future financial health.


Don’t be stupid!  Be smart. Be realistic.

Independence Day

July 3, 2014

Tomorrow is the 238th anniversary of the signing of the Declaration of Independence, a document we seem to take for granted.  It is a good day to read or reread the Declaration.  I do every year and it always evokes strong emotions about the firm boldness of our country’s founders and the risks they have taken.  Here is the final paragraph which could have been their death warrant rather than the birth certificate of our Nation should their actions have failed. 


“We, therefore, the Representatives of the united States of America, in General Congress, Assembled, appealing to the Supreme Judge of the world for the rectitude of our intentions, do, in the Name, and by Authority of the good People of these Colonies, solemnly publish and declare, That these united Colonies are, and of Right ought to be Free and Independent States, that they are Absolved from all Allegiance to the British Crown, and that all political connection between them and the State of Great Britain, is and ought to be totally dissolved; and that as Free and Independent States, they have full Power to levy War, conclude Peace, contract Alliances, establish Commerce, and to do all other Acts and Things which Independent States may of right do. — And for the support of this Declaration, with a firm reliance on the protection of Divine Providence, we mutually pledge to each other our Lives, our Fortunes, and our sacred Honor.”


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