Save Taxes – Basics of an Irrevocable Life Insurance Dynasty Trust

For all of us persons, an irrevocable a life insurance policy trust (ILIT) is probably the most efficient framework for integrating tax-free investment growth, wealth transfer and asset protection. An ILIT comprises two main parts: (1) an irrevocable trust; and (2) a life insurance policy owned by the trust. An international (or offshore) ILIT is a trust governed by the law of the overseas jurisdiction that owns foreign-based life insurance. An overseas ILIT is better than a domestic ILIT because it is more versatile and fewer expensive. Concerning US tax laws, a properly designed international ILIT is treated almost the same as a national ILIT. gst full form

An ILIT becomes a dynasty trust (or GST trust) when the trust’s settlor (or grantor, the person who ensures and funds the trust) applies his lifetime permission for the generation bypassing transfer tax (GSTT) to trust contributions. When an empire trust is properly financed by applying the settlor’s lifetime exemptions for present, estate and GST taxation, all distributions to beneficiaries will be free of gift idea and estate income taxes right through the trust, even perpetually. The individual single surprise and estate taxes exemption and the GSTT exemption are $5 , 000, 000 ($10 million for a married couple) during 2011 and 2012, which are the highest amounts in decades.

Under the ALL OF US tax code, no income or capital gains fees are due on life insurance investment growth, and no income tax comes when policy proceeds are paid to an insurance beneficiary after death of the insured. When a dynasty trust purchases and owns living insurance insurance plan and is named as the insurance beneficiary, no estate tax or era skipping transfer taxes are due. In other words, assets can grow and be enjoyed by trust beneficiaries completely tax-free permanently. Depending how a trust is designed, a section of trust assets can be used a new life insurance policy each generation to continue the cycle.

Private placement life insurance (PPLI) is for yourself negotiated between an insurance carrier and the insurance purchaser (e. g., a dynasty ILIT). Private location life insurance coverage is also known as variable universal life insurance. The policy funds are invested in an individually managed account, separate from the general funds of the company, and may include stocks, hedge cash, and other high-growth and tax-inefficient investment vehicles. Just offshore (foreign) private placement life insurance has several advantages over domestic life insurance coverage. In-kind premium payments (e. g., stock shares) are allowed, whereas domestic policies require cash. There are few restrictions on policy assets, while state regulations minimize a domestic policy’s purchases. The minimum premium determination of foreign policies typically is US$1 million. Local carriers demand a bare minimum commitment of $5 , 000, 000 to $20 million. Likewise, offshore carriers allow coverage investments to be handled by an independent investment advisor suggested by the policy owner. Finally, overseas policy costs are lower than domestic costs. A great election under IRC? 953(d) by a foreign insurance company avoids imposition of US withholding tax on insurance policy income and gains.

Whether domestic or offshore, PPLI must gratify the definition of insurance coverage according to IRC? 7702 to qualify for the tax benefits. Also, key investment control (IRC? 817(g)) and diversification (IRC? 851(b)) rules must be discovered. When policy premiums are paid in over four or five years as anticipated in IRC? 7702A(b), the policy is a non-MEC policy from which insurance plan loans can be made. If policy loans are not important through the term of the policy, then a single up-front high grade payment into a MEC policy is preferable because of tax-free compounding.