Law Office of Thomas J. Swenson
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DYNASTY TRUSTSCAPTIVE INSURANCERETIREMENT & ESTATE PLANSELDER LAW

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IRREV. LIFE INS. TRUST (ILIT)PRE-NUPTIAL PLANSINTELLECTUAL PROPERTYBUSINESS PLANNING

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A life insurance dynasty trust (LIDT) is a dynasty that owns a life insurance policy. A dynasty trust, also known as a GST, legacy or perpetual trust, is a flexible vehicle that can provide asset protection, wealth management and wealth accumulation for many generations, or even perpetually. In making contributions to a dynasty trust, an individual’s (or married couple’s) exemptions for gift taxes and generation-skipping taxes are utilized to insulate trust assets and distributions against gift and estate taxes forever — a good way to protect family businesses and hard-earned family wealth against punitive taxes, divorce and frivolous lawsuits.

When trust assets are invested in a life insurance policy, no income or capital gains taxes are paid on investment growth, and insurance proceeds pass income-tax free to the trust. Further, as noted above, there are no gift, estate, or GST taxes ever. Accordingly, trust assets continually invested in life insurance policies can grow and be distributed to beneficiaries completely free of taxes perpetually.

Irrevocable life insurance trusts (ILITs) are well-known estate planning vehicles, often used to generate sufficient funds to pay expected estate taxes. Funding an ILIT requires a grantor making a completed gift to the trust (making the trust “irrevocable”) and allocation of a corresponding portion of the grantor’s lifetime gift and estate tax exemption to the trust. A life insurance dynasty trust (LIDT) is an ILIT to which the grantor also allocates a portion of the lifetime GSTT (generation skipping transfer tax) exemption, thereby making the trust perpetually exempt from estate and GST taxes.

Different types of life insurance policies may be considered for a LIDT, as long as a policy meets the definition of life insurance provided in the Internal Revenue Code (IRC).

This law office currently recommends a particular proprietary, premium-financed life insurance vehicle that leverages the policy owner’s premium contributions with loans from a bank. The owner makes premium payments of $1X and the bank contributes $3X. In contrast to many (if not most) premium-financing programs, this vehicle does not require collateral or a personal guarantee.

For those who do not qualify for the preferred premium-financed life insurance, a standard indexed universal life insurance (IUL) policy can provide very good growth and minimized risk (i.e., no exposure to market downturns).

Another alternative is private placement life insurance (PPLI). PPLI is a variable policy and, therefore, may provide better investment returns than conventional, non-variable domestic life insurance, and PPLI is protected in segregated accounts separate from the general fund of the insurance company. Foreign-based PPLI has advantages over domestic PPLI. It has lower minimum premium commitments (min. premium commitment usu. $1 million), and has lower start-up fees and carrying costs. In contrast to foreign PPLI, domestic PPLI requires a minimum premium commitment of $5 million or more, only in cash, has higher fees, and is subject to state-imposed investment restrictions.

In contrast to PPLI, the domestic non-variable life insurance policies (e.g., indexed universal life insurance (IUL)) mentioned above do not directly own investment assets (e.g., stock equity, mutual funds) in segregated accounts; rather, the insurer invests funds and credits the policy annually depending on performance of the insurer’s general fund assets. A domestic non-variable policy is generally less risky than PPLI because it is not exposed to negative market downturns, typically, having a built-in floor of 0% regardless how badly the market performs. Depending on circumstances, therefore, domestic IUL may actually outperform PPLI.

An alternative to life insurance is either a deferred variable annuity (DVA) or a domestic fixed index annuity (FIA). Instead of, or in addition to life insurance, a Section 529 college-savings plan owned by an irrevocable trust can provide tax benefits comparable to life insurance.

Currently, the individual federal lifetime gift and estate tax and generation-skipping transfer tax (GSTT) exemptions are $11+ million. Although the U.S. Congress could lower the exemption amounts in the future, if a dynasty trust is already established, it will (presumably) be protected against prospective changes in the tax laws.

Dynasty trusts also protect family wealth against estate or inheritance taxes imposed by some states.  For example, New York’s estate tax is 10-16 percent of estate values exceeding $10+ million.  Yet, New York and all other states (except Connecticut) have no gift taxes.  Thus, “gifting” of assets to a dynasty trust protects them from both federal and state estate (or inheritance) taxes, as well as providing asset protection against possible creditors of trust beneficiaries.

In a self-settled, discretionary asset-protection dynasty trust, the grantor can also be a trust beneficiary.

For more detailed information about US tax-law compliant dynasty trusts, please consult the articles listed on this website page, or contact this office for a free consultation.

Please see additional information below, or download here.

Irrevocable Life Insurance Dynasty Trust – Basics

Private Placement Life Insurance (PPLI) — Asset protection and Tax-Free Investments

Irrevocable Life Insurance Dynasty Trust– Basics

Summary:  An irrevocable life insurance trust (ILIT) comprises two main parts: (1) an irrevocable asset protection trust; and (2) a life insurance policy owned by the trust. Indexed universal life insurance (IUL) can provide good investment returns while reducing market risk. Variable life insurance offers the potential of higher market returns, but with the risk of market downturns. At the trustee’s discretion, the trust may access policy cash value by withdrawals and tax-free loans during the life of the insured. The trust settler (grantor) may also be a beneficiary. Upon death of the insured, life insurance proceeds are paid into the ILIT free of income and estate taxes. Private placement life insurance (PPLI) in an ILIT can serve as a “wrapper” around a variable investment portfolio that grows free of income and capital gains taxes. Foreign PPLI is generally more flexible and less expensive than domestic PPLI. 

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Asset Protection and Tax-Free Investments for the Moderately Wealthy

Summary:  An irrevocable life insurance trust (ILIT) is a 100% tax-efficient tax shelter useful not only for the wealthy.  In full compliance with U.S. tax laws, an individual or a couple having a net worth of $1 million or greater can fund an irrevocable life-insurance dynasty trust that provides a life insurance benefit, asset protection, tax-free growth of fixed or variable life insurance, tax-free policy loans during the life of the insured, tax-free payment of policy proceeds to the trust upon death of the insured and tax-free distributions to beneficiaries.

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