Irrevocable Life Insurance Trust and SS 4

Irrevocable Life Insurance Trust and SS 4

Re: the SS-4 for an irrevocable life insurance trust my mother started in 1991. She gifted money yearly. My sister and I signed Crummey letters, and then that money purchased life insurance on my mother's life. The Form SS-4 [to obtain a tax identification number] requests information as to the grantor and the grantor's Social Security Number. Is that my mother? The trust is not part of her estate, but won't listing her as grantor confuse the IRS? Help!


Let's give a bit of background for other visitors:

An irrevocable life insurance trust ("ILIT") is a trust intended to hold life insurance. The trust keeps the insurance, if properly done, outside the insured's taxable estate. It also can protect the insurance value and later proceeds from claimants, divorce and other risks, and provide for a structure to assure professional management.

Typically the person who forms an insurance trust or ILIT is the grantor (also called the Trustor or Settlor) and that person is the person on whose life insurance is purchased. So, if the trust you describe is a typical irrevocable (cannot be changed) insurance trust, your mother would be the grantor and the insured.

The way to confirm the name of the person who is the grantor is to look at the trust agreement (also referred to as trust document). The trust will state who the grantor is. It should be pretty obvious.

Next, as to your question about the Form SS 4. This is the form used to obtain a tax identification number for the insurance trust. You can also get the tax identification number (also referred to as EIN, TIN, taxpayer identification number, or employer identification number) on line from the IRS. You need the EIN to open the trust bank account and the insurance company will likely want it as well.

Disclosing your mother's tax identification number (Social Security Number, or SSN) to the IRS as the grantor will not in any way impact the tax results of the insurance trust. The purpose is merely a disclosure requirement. If the trust is not funded properly, administered properly, or your mother transfers insurance to the trust and doesn't survive for 3 years (the so called "3 year rule") or your mother has retained impermissible powers of the insurance or the trust, then the proceeds will in fact risk being taxed in her estate. Disclosing her Social Security Number as the grantor should have no impact on that.

What you really should do is meet once a year with the attorney who prepared the trust. Your accountant should be involved at least by conference call, and the insurance agent/broker should attend as well. At that meeting not only should your questions be addressed, but the Crummey powers should be reviewed, the insurance coverage evaluated, and all other aspects of the administration of the trust should be addressed. An hour a year to be sure the planning works is not a lot of time, effort or cost given what might be at stake.

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