Legal Question in Wills and Trusts in California
We live in California. we have a Living Trust. Our net worth is over $1 million. My brother in law has a $50,000 life insurance policy where my wife (his sister) is the primary beneficiary. he is delinquent and is in jeopardy of having the policy cancelled. He wants us to pay the premium from here on out. I am only inclined to do this if he transfers ownership of the policy to us or to our Living Trust. If he transfers ownership, he is saying when the policy pays out, the proceeds would be taxable and the best way to go is to leave the policy in his name and make the Trust the Irrevocable Primary Beneficiary. Which is the best way to go: 1) transfer the policy to the Trust, or 2) leave it in his name with an irrevocable beneficiary, or 3) ?
3 Answers from Attorneys
Your instincts are correct. If you are making the payments you should own the policy AND have the trust named as irrevocable beneficiary. At present your trust will still pass inheritance tax free using the A-B trusts and allocation on the death of the first spouse to die.
It is called an ILIT, an irrevocable life insurance trust. Keep in mind this is a gift from him. I don't know how much he has invested in the policy before becoming unable to pay but that investment may not be something he is willing to just let go.
I think you need to crunch some numbers to see how this pencils out for you. The death benefit is relatively low ($50,000). What are the premiums? How many years will you be making the premiums? Couldn't you do better to increase existing coverages on yourselves rather than bother with his policy? I realize that he is making a nice gesture to have the policy benefit your wife, but the economics may not warrant keeping the gift.
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