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Life Insurance.

Even if you have substantial assets, life insurance can play an important role in estate planning - especially if much of your wealth is tied up in illiquid assets such as a family-owned business or real estate. In such cases, life insurance proceeds can be used to settle an estate tax bill that might otherwise require the fire-sale liquidation of your family's crown jewels. (A prime example: the Wrigley family's forced sale of their 80 percent stake in the Chicago Cubs and Wrigley Field in '81.)

But while many CEOs should have life insurance policies, most probably shouldn't own them. Why? Because while life insurance proceeds are generally exempt from income taxes, they are subject to onerous federal estate taxes.

"I tell CEOs that if they own their policies, the federal government is a 50 percent beneficiary," says Curtis Ford, an insurance tax planner and past president of the American Society of CLU and ChFC. "If you want to change that, you have to change the ownership."

How? Create an irrevocable life insurance trust to assume ownership of the insurance policy. The trust can name whomever you wish as beneficiary. If the proceeds are intended to pay off estate taxes, the trust can be structured so that it has authority to buy assets from your estate, or lend money to it, following your death.

To make sure the Internal Revenue Service won't object to this strategy, you must name somebody other than yourself or your spouse as trustee. A friend, a bank, an attorney, or even another member of the family are acceptable choices.

As with any estate-planning decision, you shouldn't postpone creating an irrevocable life insurance trust once you determine that you need it. For one thing, none of us knows when we're going to die. For another, tax laws contain a three-year pullback provision for life insurance trusts that are funded with an existing policy. This means that if you die within three years of transferring a policy to such a trust, ownership of the policy will revert back to your estate. This isn't an issue if you're funding the trust with a new policy.

Even if the proceeds of your life insurance policy aren't needed to satisfy estate taxes, there's little reason not to put it into a trust. By doing so, you ensure your estate and therefore your heirs a healthy tax savings, even as they continue to enjoy all of the income generated by the trust. In many cases, they can even make use of the principal.

Suppose, for example, you name your spouse as the beneficiary of your trust. He or she can invade the principal for health reasons or to maintain an accustomed standard of living. Among the few restrictions: your spouse can't invade the principal on a whim ("I want to buy a matching pair of yachts!") nor can your spouse leave the assets of the trust to his or her own estate or the creditors of that estate.

To be sure, there are a few instances where there's no advantage to be gained by shielding a life insurance policy in a trust. If the net value of your estate is less than $650,000, for example, it won't be taxed anyway, since the first $650,000 is excluded from federal estate taxes. (That amount is scheduled to gradually increase to $1 million by 2006.) And if you name a charily as the beneficiary of your life insurance policy, your estate will get a deduction for that charitable contribution equal to the size of the insurance payout, again making the trust's tax benefits a moot point.

When deciding whether or not to shield an insurance policy in a trust, don't base your decision exclusively on your current circumstances, which may change over time. Your net worth may go up, for example, or the charily you want to help could shut down. Perhaps someone in your family will become disabled or seriously iii, and will need extra money that you might otherwise have channeled to a charitable organization.

Don't forget about insurance policies provided through your employer's group insurance plan, either. In most cases, you have the right to assign these policies to a trust.
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Copyright 1999, Gale Group. All rights reserved. Gale Group is a Thomson Corporation Company.

Article Details
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Author:Myers, Randy
Publication:Chief Executive (U.S.)
Article Type:Brief Article
Geographic Code:1USA
Date:Oct 1, 1999
Words:701
Previous Article:Real Estate.
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