Estate Tax Alert – Insurance Trusts at Risk Under Proposed Tax Law

Estate Tax Alert – Insurance Trusts at Risk Under Proposed Tax Law

The proposed tax law being discussed in the news has some very serious tax consequences for what are called “grantor trusts.” All estate planners and insurance advisors are trying to assess the impact if the proposed changes to grantor trust taxation are passed. All insurance trusts are “grantor trusts.” You don’t need to know what a grantor trust is to understand the problem. There are many types of grantor trusts which create big loopholes in the law and which many people think are abusive, but insurance trusts are not abusive. They are just good planning!

Under the proposal, all insurance trusts that do not have their own independent source to pay premiums are in trouble. What this means is that if the settlor(s) give money to their trusts to pay the insurance premiums each year, then a portion of the death benefit will be brought back into the settlor’s estate when he or she dies. The same will be true if a settlor adds tax-free annual exclusion gifts to a trust after the law becomes effective. The percentage brought back into the settlor’s estate will be based upon the amount of premiums paid on the policy before the new law takes effect compared to the total premiums paid after the law becomes effective. This change will upset countless estate plans and is one reason I think there is a good chance it will be removed from the tax bill. But one cannot be sure.

If the grantor trust changes do pass, then we will have to find an alternative way for the settlor to pay the insurance premiums. Making an annual gift to the trust, the most common method of paying the premium, no longer will work. The main alternatives to deal with this problem appear to be: (i) changing the payments the settlor makes for the insurance from gifts to loans to the trust, (ii) transferring assets this year into the trusts that own the insurance so that the trusts have annual income that can be used to pay premiums (next year may be too late), (iii) borrowing the premium or making withdrawals from the policies if there is enough cash value in the policies to pay the premiums or (iv) have the trustee distribute the policy to the beneficiaries. This will take careful analysis because a mistake may be very costly.

I still think that this was an “inadvertent” mistake that may be cleaned up and removed from the tax bill. But maybe it was part of the plan, if there really is a “plan.” If you or your spouse created a trust that owns life insurance, you urgently will need to review your options before you put any new money into the trust.

AND just as important, Congress is contemplating lowering the exemption from Estate and Gift Taxes from over $11 million to about $6 million. If you are married and have assets that exceed $12 million, or if you are single and have assets that exceed $6 million, you may still be able to “lock in” the higher exemptions, but you must act quickly.

Alan Mittelman and Dana Bernstein are ready to review your situation and help you plan a strategy. Alan’s email is and Dana’s email is We look forward to hearing from you.


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