Case Scenario
Married couple, Don and Barb are both in their 70s and have a growing estate. Although their estate will not be subject to estate taxes under current law, it may be at risk in the future as the value of their estate increases and estate tax laws change. Don and Barb have three adult children who have families of their own, including four adult grandchildren. Although their children have jobs and a stable income, Don and Barb would like to help them out financially. They would like to see their children and grandchildren enjoy the money, so they prefer a lifetime strategy over one that solely depends on their passing.
Their Goals
- Don and Barb want to make gifts to their children and grandchildren in a responsible manner.
- They want to see their children and grandchildren enjoy the gifts.
- They prefer solutions that will be sensitive to their possible future estate tax concerns.
and enjoy the results for your
children and grandchildren.
A Possible Solution
Don and Barb create an irrevocable life insurance trust (ILIT). The ILIT provides instructions to the trustee as to how Don and Barb would like the money distributed to their children and grandchildren. It has provisions to protect the assets inside the trust from future potential creditors,1 but allows the trustee to distribute money for certain purposes not only after Don and Barb have passed, but also while they are still alive.
When Don and Barb make a gift to the trust, it qualifies for the annual gift tax exclusion (limit $19,000 in 2025) as a present-interest gift because each one of the beneficiaries has a right to withdraw a portion of the given amount for a limited period. In other words, even though the kids do not have immediate use of that gift, the right to withdraw makes it a present-interest gift. As part of the process, the trustee must send a letter to each beneficiary to inform them of the gift. This “Crummey notice” typically gives the beneficiaries a set period of time (such as 30 days) to withdraw their portion of the gift.
Don and Barb make annual gifts to the trust of $19,000 per beneficiary of the trust ($19,000 x 3 kids and 4 grandkids = $133,000 each x 2 =$266,000 per year). Their financial and legal professionals have discussed that, over time, these gifts can help keep their net worth from growing too large, which would then subject them to estate tax in the future, depending on future tax law changes.
The trustee decides to use some of the gift each year to buy a second-to-die life insurance policy on Don and Barb. The ILIT will be the owner and beneficiary of the policy. The trustee will have access to cash values2 (if necessary) while the insureds are alive. At Don and Barb’s death, the trustee may purchase assets from the estate with the death benefit to provide some liquidity to pay expenses and estate taxes while keeping the estate’s assets intact. The trust will continue after their passing so that it can distribute assets to the children and grandchildren for years into the future.
- 1You should consult with your own legal counsel to determine whether the laws in your state exempt personal and/or business assets from the claims of creditors.
- 2Access to cash values through borrowing or partial surrenders will reduce the policy’s cash value and death benefit, increase the chance the policy will lapse, and may result in a tax liability if the policy terminates before the death of the insured.
Any examples provided are hypothetical and for illustrative purposes only. Examples include fictitious names and do not represent any particular person or entity.
Participating whole life insurance policies are issued by Massachusetts Mutual Life Insurance Company (MassMutual), Springfield, MA 01111-0001.
