An Irrevocable Life Insurance Trust (ILIT) is set up when some has a Federal Estate Tax problem, see chart below:

Life insurance proceeds are included in a deceased person's estate for Estate Tax purposes if you have any incidents of ownership of the policy.

This is affectionately known in the business as "Taxation without Respiration."

The ILIT is set up to remove any incidents of ownership by the owner/insured so that the life insurance itself does not become part of the taxable estate and futher compound the tax burden.

Please note the event that triggered the tax.

Mom or Pops died.

Since Mom or Pops died the Gubment now wants only a maximum of 55% (2011) of the total value of their Estate that exceeds the exemption to be paid in cash nine months from the date of death.

Hmmmmm, how do you say.... confiscatory.

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Gary Spicuzza, *SAFE
Copyright 1956
No Rights Reserved
*Self Appointed Financial Expert

Excellent post and highly informative.But to put it in more simpler words A life insurance trust is a trust that is set up for the purpose of owning a life insurance policy. If the insured is the owner of the policy, the proceeds of the policy will be subject to estate tax when he dies. But if he transfers ownership to a life insurance trust, the proceeds will be completely free of estate tax.

The text that you have put down might just look complicated to newbies who will be out here.I am new to this forum but definitely not to life insurance.

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Life Insurance Terms

Key word in this post is "Irrevocable" - Simply adding life insurance to your current trust, likely a "revocable" trust does not take the proceeds out of your taxable estate. In an ILIT you actually do not own the life insurance policy, the trust does. If you buy the insurance before you set up the ILIT, and the insured dies within 3 years, the proceeds are part of the taxable estate. If you set up the ILIT, then have the ILIT purchase the insurance to you - then the proceeds are not subject to the 3 year rule and are guaranteed to pass outside the taxable estate.

However, before one has to set up an ILIT a married couple can maximize both of their individual Federal Estate Tax exemptions by setting up an A-B Trust.

See graphic below at bottom of this post.

Further, for married couples, there are life insurance policies on the market known as "Second-to-Die" polices where both husband and wife are insured under one contract that pays the death benefit when the second spouse dies which is the event that triggers the Estate Tax in the first place.

Remember, the dirty little secret when it comes getting caught in the Probate Court System or paying the confiscatory Federal Estate Tax burden....it's when the second spouse dies,....is when all these financial problems manifest themselves for your children and loved ones.

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Gary Spicuzza, *SAFE
Copyright 1956
No Rights Reserved
*Self Appointed Financial Expert

Is it possible for a liv-in couple to set up an A-B trust?

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Resolve your queries through the insurance forums

jeffery_scott76 asked:

Quote:

Is it possible for a live-in couple to set up an A-B trust?

Non-married couples can set up a joint trust with each other but I don't know anyone who would recommend such an arrangement.

People change when people die.

That being said, we've had clients that are adamant about treating EVERYTHING as if they are husband and wife with EVERYTHING split between all children of their previous marriages.

I'm not aware of any legal reason why non-married couples could not employ the A-B Trust technique. If fact it may be legally easier since they are not married and the survivor would be nothing more than an income beneficiary on the deceased person's trust that would be distributed to his/her beneficiaries upon the death of the second significant "other." Plus it may be less cumbersome and easier to fund the trusts and split all assets in each other's respective trust since they are not married.

Then, just like any other A-B Trust arrangement, that would utilize both person's Federal Estate Tax exemption to shelter up to $4,000,000 in 2008 from the Gubment.

ALL THAT BEING said....that's definitely a question for a top of the line Estate Planning attorney in the state where you reside.

What a very..... interesting, thoughtful, and intelligent question!

__________________
Gary Spicuzza, *SAFE
Copyright 1956
No Rights Reserved
*Self Appointed Financial Expert