Listen to Lawrence…Paying premiums for life insurance within a trust

February 4, 2021
In my last LISTEN TO LAWRENCE email, we established that it is common for people to transfer their life insurance policies into irrevocable trusts.  Among other reasons, this is done for estate tax and Medicaid protection reasons.  We also discussed that once the trust owns the policy, the trustee should pay the premiums, if the trust has money to do so.  If the trust does not have the money, then you (the grantor) will have to make the premium payments.  What issues does this raise?
If you pay the premium for the trust, you are essentially giving the trust a gift of the premium amount.
For my affluent clients who create these trusts to remove their life insurance from their taxable estates, this premium gift is potentially taxable (or uses up a small portion of your lifetime credits).  It is taxable if no person has a present interest in the gift, which they won’t have if the trust keeps the money or uses it to pay for the life insurance. We get around this, at least to the extent of $15,000 per beneficiary, by giving the trust beneficiaries an immediate right to pull the money out of the trust for a limited time (usually 30 days).  This is called a Crummey power (don’t ask why).  Assuming they do not pull the money out, the trustee can (after the 30 day period), use the money to pay the premium.  Yes, this is complicated.   If you have a taxable estate and want to remove your life insurance from your estate, please call us for a consultation to discuss this method.
For my Medicaid protection clients who put their insurance policies into an irrevocable trust, the tax consequences are irrelevant because your estates are far below the taxable thresholds, so for all practical purposes, there are no gift tax issues. However,  if you pay the premiums on the life insurance for the trust, you may be making additional gifts to the trust, subject to a look back.  As a practical matter, this has not been a problem and, in any event, you are still likely to be in a better position to protect the insurance and its cash value by placing the insurance in the trust.  If you wish to protect your life insurance from Medicaid, please call us for a consultation to discuss this matter.
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