Missing Estate Plan Series

Submitted by Justin Cooper on Wed, 2013-08-28 15:57

I understand the importance of life insurance to protect IRA values and agree, but I’m confused on a couple of things starting on page 23 of the eseries book. It mentions to have the life insurance premiums to be paid by either beneficiaries or trustee of an ILIT, to avoid estate tax on the proceeds. Does this refer to paying the premiums from the IRA to pay for the life insurance? How do you do this if the insured is still alive and the payment goes from the IRA to a checking account first?
Also, under what circumstances are life insurance proceeds estate taxable?
The other thing that stumped me is how by changing the IRA beneficiary from wife to daughter of a $1 million value would avoid estate tax. Wouldn’t anything under the $5.2m be exempt? I only ask these things, as I’m a beginner towards these strategies.



Submitted by mk foss on Tue, 2013-09-03 16:30

I don’t have the book but will provide some general information.To avoid having life insurance proceeds included in your estate, the insured cannot have any incidents of ownership in the policy. The first step is to have the policy owned by either the beneficiaries or an ILIT. The owner pays the premiums – not the IRA and not the insured. The proceeds are taxable for estate tax purposes if the insured owns the policy or can change beneficiaries or in any other way act like an owner or if the proceeds are used to pay estate tax or debts of the insured upon the death. I’m not certain about the other question but it seems to relate to using some of the $5.2m by changing beneficiary to the daughter. When the wife is the beneficiary, none of the $5.2m is used. 



Submitted by fairira on Tue, 2013-09-03 18:01

Ms. Foss,Q.1–If the insured has no incidents of ownership in a life insurance policy on his life, why would a beneficiary’s payment of any debts of the deceased insured result in at least that part of the death benefits being included in the deceased’s taxable estate? Q.2–Is the reason that it might raise a question of whether there was a prearrangement between the beneficiary and the insured to pay certain bills or debts of the insured or is there some other reason? Q. 3–If the insured made an annual gift to the beneficiary equal to the beneficiary’s premium payments for the life insurance policy, would this bring the life insurance proceeds into the insured’s estate?Thank you.  



Submitted by mk foss on Wed, 2013-09-04 00:40

  1. If the insured has no incidents of ownership but the policy is earmarked for payments of the debts of the deceased or estate tax, it’s part of the gross estate because the ability to direct those payments would be an incident of ownership. You don’t trace what a beneficiary does with insurance proceeds that they receive personally. If the beneficiary pays the deceent’s medical bills from personal funds and also receives a life insurance settlement that’s not a problem.
  2. A prearrangement for use of a gift is always a problem.
  3. Often an insured parent will give gifts to children which are sufficient to pay the premiums the children owe for the insurance policy. As long as the child can spend the money instead of making the premium payment – it’s not added to the insured’s estate. A gift of a policy to children (who then continue the payments) that occurs within 3 years of death will be brought into the estate though.
  4. Form 706 asks if there is any insurance on the decedent’s life not included in the return. The executor answers that question truthfully and furnishes the details. This gives IRS some information that they can choose to follow up on.


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