Ownership of kids' policy question...Am I crazy/stupid?

[T in CA]

Hey all,

A good friend and client recently shared that he has policies on his 3 kids (late teens to early 20's) which he has been paying into for 10+ years and all of which have large death benefits and significant cash value...

Around 2 years ago another advisor/attorney had him change the ownership (and beneficiary) of those policies to be my client's ILIT of which his wife is the trustee...Am I missing something? I can't see what the benefit of this is and in fact, think it may have been a huge mistake. And, if so, why would he keep paying and building up cash in those policies when the "kids" will not be able to benefit.

He has 2 policies on his own life which are owned by the ILIT - for estate tax purposes - which I get....but I'm just not comprehended why that ILIT would own the kids' policies.

Again, I may be missing something and will be reaching out to a few estate attorney friends....but figured I'd ask this group as well.

 

[STIBROKER]

The advisor/attorney sleeping with the wife?

 

[Allen Trent]

No idea. Only things I can dream up is someone worried about creditors/lawsuits.

If they have enough wealth to be concerned about estate taxes, maybe some sort of Generation Skipping Tax planning.

 

[STIBROKER]

WEIRD thing is wife being trustee......estate taxes don't kick in until surviving parent dies and wealth is transferred to kids.......and what the kids policies are doing in there is just bad advice.....

 

[titeye]

Hey all,

A good friend and client recently shared that he has policies on his 3 kids (late teens to early 20's) which he has been paying into for 10+ years and all of which have large death benefits and significant cash value...

Around 2 years ago another advisor/attorney had him change the ownership (and beneficiary) of those policies to be my client's ILIT of which his wife is the trustee...Am I missing something? I can't see what the benefit of this is and in fact, think it may have been a huge mistake. And, if so, why would he keep paying and building up cash in those policies when the "kids" will not be able to benefit.

He has 2 policies on his own life which are owned by the ILIT - for estate tax purposes - which I get....but I'm just not comprehended why that ILIT would own the kids' policies.

Again, I may be missing something and will be reaching out to a few estate attorney friends....but figured I'd ask this group as well.

You may not have enough information to comprehend. There are a few things, perhaps, that we can infer from the limited information you provided.
1. It makes complete sense for your friend to continue making premium payments. If for no other reason, it keeps the cost of insurance down; and therefore, builds up cash values faster. Hopefully, he is maximum funding every cash value policy they own. Since he bought the policies when his children were toddlers and teenagers, his plan all along may have been to maximum fund those policies until the cash values alone grew to a sufficient level to keep the policies in force.
2. So long as your friend is the owner of his kids policies, they remain in his estate. Would it have made sense to change the ownership to them, once they reach(ed) the age of majority? If mom and dad are the beneficiaries, changing the ownership to the kids would not have been an effective estate planning strategy.
3. To remove those assets from your friends estate, he had to put the kids policies in the ILIT. Especially if the parents are the beneficiaries. Had he put them in a revocable trust, the assets would have remain tied to his estate.
4. The fact that he has an ILIT himself suggests that he feels pretty confident that he has more money than he and his wife will ever spend in their lifetime. When they both die, the children will inherit all their wealth, including life insurance benefits. In effort to prevent the kids from misusing or mismanaging their inherited wealth, he may have dictated in his own trust that all non-qualified assets fund the kids ILITs, for their protection.
5. There also exists the possibility that he planned for the kids to have policies in place to protect their own families, at some point in the future. Perhaps their ILITs were created to force the children to use the policies as he planned, instead of how they may want to use them.

All of the above seem to be fitting for putting the kids policies in ILITs.
On the other hand, I could be completely wrong!

 

[Tahoe Ray]

Having the spouse as trustee of an ILIT is normally a bad idea to begin with.

Are they paying premiums from joint assets?

 

[T in CA]

The advisor/attorney sleeping with the wife?

And maybe "offing" the kids too?

You may not have enough information to comprehend. There are a few things, perhaps, that we can infer from the limited information you provided.
1. It makes complete sense for your friend to continue making premium payments. If for no other reason, it keeps the cost of insurance down; and therefore, builds up cash values faster. Hopefully, he is maximum funding every cash value policy they own. Since he bought the policies when his children were toddlers and teenagers, his plan all along may have been to maximum fund those policies until the cash values alone grew to a sufficient level to keep the policies in force.

I may not have mentioned these are whole life policies not paid up until 95; There is a ton of cash and it has been buying up additional insurance (paid-up additions)...

2. So long as your friend is the owner of his kids policies, they remain in his estate. Would it have made sense to change the ownership to them, once they reach(ed) the age of majority? If mom and dad are the beneficiaries, changing the ownership to the kids would not have been an effective estate planning strategy.

Yes, it would have made sense to move to the kids. I would've done that and changed beneficiaries to the sibliings...until the get married and/or want to change

3. To remove those assets from your friends estate, he had to put the kids policies in the ILIT. Especially if the parents are the beneficiaries. Had he put them in a revocable trust, the assets would have remain tied to his estate.

He a tremendous amount of life insurance personally all owned by the same ILIT; the cash value...while significant would not make a big difference

4. The fact that he has an ILIT himself suggests that he feels pretty confident that he has more money than he and his wife will ever spend in their lifetime. When they both die, the children will inherit all their wealth, including life insurance benefits. In effort to prevent the kids from misusing or mismanaging their inherited wealth, he may have dictated in his own trust that all non-qualified assets fund the kids ILITs, for their protection.

To be honest he does have more than he will ever spend...but he doesn't know/remember why the advisor/attorney suggested moving he ownership to the ILIT

5. There also exists the possibility that he planned for the kids to have policies in place to protect their own families, at some point in the future. Perhaps their ILITs were created to force the children to use the policies as he planned, instead of how they may want to use them.

All of the above seem to be fitting for putting the kids policies in ILITs.
On the other hand, I could be completely wrong!

Appreciate all you input

 

[T in CA]

Having the spouse as trustee of an ILIT is normally a bad idea to begin with.

Are they paying premiums from joint assets?

Yes - $26,000 which represents the annual exclusion from quite a few years back for he and his wife

 

[Allen Trent]

I may not have mentioned these are whole life policies not paid up until 95; There is a ton of cash and it has been buying up additional insurance (paid-up additions)...

Does seem odd to have what appears to be a more cash accumulation focus of overfunding PUAR inside an ILIT because of the restrictive access to ILIT in future

Yes, it would have made sense to move to the kids. I would've done that and changed beneficiaries to the sibliings...until the get married and/or want to change

Actually, changing ownership to the kids after they had built up cash values likely would have caused the couple to owe gift taxes on the ownership change. Married couple can only give 36k per year to someone & this couple is likely already using that annual gift exclusion to fund the ILIT on the parents. So, your suggestion to change later could have triggered sizeable gift tax bills.

 

[Allen Trent]

Yes - $26,000 which represents the annual exclusion from quite a few years back for he and his wife

If they are using gift tax exclusion to fund policies on kids, how are they gifting money to the fathers ILIT to cover his life premiums in his ILIT?

Only way I can think this could be done is if the ILITs have different beneficiaries & thus more gifting room. Without the kids having their own kids yet, not sure it would open more gifting annually. Paying premiums is a gift to the ultimate beneficiaries of the ILIT, not a gift to the insured on a policy