Insurance is subject to estate tax if the insured owns it. One way to avoid estate taxes is for an
irrevocable trust for the benefit of the children of the insured to be the
applicant, owner and beneficiary of the insurance policy. But, under this solution, the spouse of the
insured gets no benefit from the insurance proceeds.
insured is the grantor/creator of the insurance trust and that his wife is the
beneficiary of the trust. If her rights
to use the proceeds at her husband's death are limited by an ascertainable
standard-health, education, support and maintenance-the insurance would not be
included in the husband's estate because he had no rights in the insurance and
it would not be includable in the wife's estate because of the restrictions on
But if the
wife were the grantor of a portion of the trust, that portion would be
includable in her estate because her rights would have been a retained
use rather than ones given her by her husband.
If community property money were used to make gifts to the trust (which
in turn would be used by the trust to pay the insurance premiums) 50% of the
trust would be includable in the wife's estate for estate tax purposes.
Let's say the
wife takes the amount of the premiums from a joint account and agrees in
writing to gift it to the husband as his separate property. The problem here is
there is a step transaction: the wife
didn't make a gift to the husband out of disinterested generosity, but rather
because she knew that he would use the "gift" to contribute to a trust for her
benefit. The IRS would have an excellent
case for including 50% of the trust in the wife's estate.
What if the
couple tries again? This time they agree
in writing that an account twice as big as the premium will be annually converted
from community property to half the husband's separate property and half the
wife's separate property. The converted amounts will then be titled in new
accounts each one under one spouse's name only. The husband would use his
account to make the gift to the trust and the wife would keep her account
separate and would never use it for the husband's benefit. With this scenario, the husband has
contributed only his separate property to the trust and the wife would not have
a retained use, i.e., none of the trust will be included in her estate for
estate tax purposes.
But who will
monitor the above arrangement? Who will
see to it that the doubled amount is deposited half and half into separate
accounts? Who will see to it that only
the husband's account is used for the gifts?
Who will see to it that the wife doesn't use her account for the husband's
For the above
reasons it may be preferable not to give the non-insured spouse rights in the irrevocable
trust because the estate tax risk of including half in her estate by not
following all the rules may outweight the benefits.
Spiro is a Beverly Hills attorney who is a certified specialist in
Taxation and in Estate Planning, Probate and Trust Law. He holds a Masters
Degree in Taxation from Golden Gate University and has taught tax and estate
planning courses at UCLA and USC. He has been named as Super Lawyer by
Los Angeles Magazine.
Access Randy Spiro's
Martindale-Hubbell profile on www.martindale.com