Annuity in an Irrevocable Life Ins. Trust

Submitted by Danny Harlow on Thu, 2019-02-21 23:03

Hello

I have a client who has established an ILIT. The trust does not hold a life insurance policy however; the trust actually owns fixed annuities. The client does not know why this is the case. The total gains on these policies is approximately $50 – 60k which are tax deferred as they are annuities.

Question– will the gains on these annuities become taxable to the trust (and using trust tax rates) upon the death of the client (whom is the insured)? Or does the fact that the ILIT is the owner allow for tax free gains upon his death (as would be the case in a life insurance policy)?



Submitted by Bruce Steiner on Sun, 2019-02-24 19:40

  • There’s no basis step-up for annuities.
  • There’s often no good solution to a investment-type annuity.  If you cash it in all at once, you bunch the income.  If you keep it, you continue to incur the costs, and the future income and gains will be ordinary income with no basis step-up.
  • Often the best you can do is cash in as much as you can each year without going into too high a tax bracket.
  • Note that an insurance trust is likely to be a grantor trust for income tax purposes.
  • The beneficiaries may have a claim against the trustees for investing in an annuity.  The court held for the trustee in the Berget case in Minnesota, https://cases.justia.com/minnesota/court-of-appeals/2014-a13-2295.pdf?ts=1418077703 , but the decision was based on the facts of that case, and the court noted that the result might not be the same in the next case.  Of course, given the amount involved in this case, it might not be practical to pursue a claim.
  • Bruce Steiner

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