Legal Question in Wills and Trusts in California

Re: Irrevocable Trusts

It is possible to have the heirs buy the insurance themselves, but most of these plans seem to fall by the wayside. (People forget to pay the premium, or stop paying because they "need" the money for something else, etc.)

Most of these trusts still allow some period for the beneficiaries to take the gift outright, rather than it going into the trust, but most beneficiaries let it go to the trust because it will grow to a much larger amount over time.

The policy (or other trust assets) are owned by the irrevocable trust, so such assets will be outside the donor's estate if the transfers are handled properly.

Re: Trusts

An irrevocable insurance trust must be carefully drafted so as to keep the insurance death benefits outside the taxable estate. Generally speaking, the insured person must avoid having any "strings" to the insurance and there are various provisions of the Internal Revenue Code that guide himas to how to do this. To describe the technique in more detail is too complicated for here. Among other reasons, people use the death benefits in an irrevocable insurance trust to pay the estate tax on assets they want to pass intact to their heirs (so that the heirs do not have to liquidate the assets to pay estate tax). If the person were to make an outright gift of the assets, gift tax would be due. The estate and gift tax are part of a unified scheme, with a unified rate structure, and there is only one exemption for both. So the idea is to avoid using the exemption unnecessarily. For a more detailed explanation, get a free consulation with an estate planning attorney -- many of us give them.