My clients have two Survivorship policies in an ILIT with approx $360k cash value, we wrote a new Survivorship policy that will be in a new IDGIT. How can we 1035 the value from the old policies into the new ones inside the new intentionally defective grantor irrevocable trust?
Since you're obviously a bit more sophisticated then most visitors we'll define and explain some of your question so that others can learn from it as well.
My clients have two Survivorship policies ... this is referring to survivorship life insurance, which is often called second to die insurance. It is insurance that pays when the second of two people die. For a married couple that can use the unlimited estate tax marital deduction (and applicable exclusion, the amount that can be bequeathed tax free) this is the point in time when an estate tax may be do so it is often an efficient and economical means of paying the tax.
in an ILIT ... for regular folk that is an Irrevocable Life Insurance Trust .... a trust that owns life insurance to protect the cash value and proceeds from divorce and creditors and to endeavor to remove the proceeds from the insured's and perhaps others' taxable estates.
with approx $360k cash value, ....cash value, or cash surrender value (CSV) is the amount you would receive when you surrender a policy to the insurance company. It does not often equal fair value.
we wrote a new Survivorship policy that will be in a new IDGIT.... an IDIGIT, IDGIT is an Intentionally Defective Grantor Trust or an Intentionally Defective Irrevocable Trust. It can be an ILIT that is taxed as a grantor trusts (most ILITs are anyhow). This means that the grantor (also called settlor, or trustor, the person who set up the trust) pays income tax on it. Note that there is rarely income in most insurance trusts, but there can be other advantages of grantor trust status, such as facilitating the transfer of assets, such as insurance policies, between trusts, without an income tax consequence. A transfer of an insurance policy could trigger the "transfer for value" rules which could result in the insurance proceeds being subject to income tax. There are a number of exceptions to this rule, including when the transferee is the insured. If both trusts are grantor trusts then this exception may avoid that tax trap.
How can we 1035 the value from the old policies into the new ones inside the new intentionally defective grantor irrevocable trust? ... for regular folk a "1035" refers to a Code Section 1035 exchange of one life insurance policy for another without triggering income tax (in simplistic terms its the life insurance equivalent of a 1031 like kind exchange for real estate). SOunds like there are two steps being mixed here. One step is a 1035 exchange of existing policies for new insurance policies. That can be evaluated under the rules of Internal Revenue Code Section 1035. The general counsel for the life insurance company may also prove a great help in that regard. The second issue is whether you can transfer the policy (pre or post 1035) from the old insurance trust to the new insurance trust (the IDIGIT). That will depend on the grantor trust status of the trusts and the terms of the trust. You have to be rather careful as well. If the terms of the trust differ, what is the impact on the various beneficiaries? Are you exposing the trustees to any type of liability? How can that be minimized or addressed? If you have minor beneficiaries in the transferor ILIT (the old trust) are they being protected? What rights might be affected.
Do you have the legal basis to pour over assets from one trust to another trust (decant). Many trusts have power to pay trusts corpus over to or for the benefit of a beneficiary. PLR 200530012 indicated that a state court determination that under state law the authority to pay to or on behalf of a beneficiary allowed for the payment in further trust. Restatement Second provides some authority. A trustee’s power to distribute is akin to a power of appointment. If you have a power to appoint outright to a beneficiary you should have the power to do something to a lesser extent, namely appoint to a further trust. Some states that have enacted decanting statutes have all confirmed that power to appoint in further trust is considered to be a power of appointment.
Interesting question but a host of issues should really be researched further and confirmed before proceeding: 1035, transfer for value, legal right to make the transfer, decanting, etc. Hopefully some of the above will give you some guidance.
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