Author Topic: Standard annual "gift" or put money in irrevocable life insurance trust?  (Read 1618 times)

Better Change

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Recently my parents came to the (wonderful!) realization that they will have too much (!!) money for retirement.  They've always been pretty decent savers, but they're just now realizing that they can't possibly spend as much as they've stashed.  While we're not talking about billionaire level here, it will exceed the threshold for avoiding heavy estate taxes.

In an effort to slowly bleed some of the cash over what I hope are the next several decades, my parents want to do the typical tax-free gifting every year.  There are two ways they've considered giving the money to us: 1) cash or 2) money towards premiums on an irrevocable life insurance trust (with me as the beneficiary).  My husband and I don't need the money right now, as we're well on our way to our own FIRE scenario, but it would be nice to be able to invest the money over the years and watch it grow.  My mom, who is VERY risk-averse, prefers the life insurance trust, because it "diversifies" our portfolio and is sheltered from the ups and downs of the market.  Historical data suggests that the insurance pay-out would be in the low single-digit millions, but we don't have any concrete numbers yet: the process requires lengthy medical evaluations, which my parents have just begun.
 
Any strong opinions about either route?  Attorneys who can chime in about the trust?

terran

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Life insurance other than term is usually not a good deal. Insurance should be used to cover unexpected but life altering events (death of a wage earner before they're done earning wages), not as an investment (a place to put money until someone dies of old age). Your parents should give you the money as cash and you should invest it. If you are in a lower tax bracket or are comfortable holding the same investment I think they could transfer investments directly to you to keep the capital gains tax bite lower.

Also note that they can each give up to the annual gift limit, and they could give to both your husband and you, so that would be $56k/year. Your husband would be able to keep the gifts to him in the event of divorce, whereas if you're careful to keep it separate from joint accounts he may not be entitled to gifts given to you, so that's something to think about.

If you have or plan to have kids your parents could set up a 529 for them (in your name which can later be transferred if you don't have them yet). You'd have to check if this counts towards the gift limit if it's in your name.

WoodStache

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So having the money in cash to invest on your own is almost undoubtedly better, especially knowing that you're very conscious of your finances.

But my advice would be to state your preference and then let it go. They want to feel like they're doing something great for you, and regardless of maximizing the return they obviously are. You don't need the money now and the last thing you want is for it to be a source of tension.


PepperPeter

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Not an attorney, but a trusts and estates paralegal, and I spent a lot of my time helping clients administer ILITs.  Personally, unless you need the liquidity of a life insurance policy at death, I wouldn't go through the trouble myself.  It's a lot of admin headache and making sure you aren't running afoul of documentation requirements (crummey notices for contributions, etc.).  Plus many attorneys recommend you file gift tax returns every year even if you are under the annual exclusion amount to either opt in or opt out of automatic GST allocation, which may be an issue if your parents anticipate having taxable estates. 

TL;DR - too much of a headache in my opinion.  I'd go with cash.

Highbeam

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Sounds like they don't trust you to manage their "gift" properly. Do they think you're doing it wrong? Why else burden you with this unnecessary and inefficient game?

Better Change

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I agree that this is a giant paperwork headache.  My mom's poor reasoning is that my husband and I are already in a fairly high income tax bracket (true), and she doesn't want us to pay additional taxes in capital gains every year when we simply turn around and invest the money.  Truthfully, that tax is pretty piddly on the $28-$56k that's under consideration here.

WoodStache hit the nail on the head - this is THEIR WISH, so I am going along because they think it's best.  But I'm also trying to put together a logical argument against the trust.  They like to believe their hack of an Edward Jones advisor; I want to be equipped with enough data to fight back with reason.  I was hoping for some additional ammo from the pros here.

Paul der Krake

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If they bleed out 50k per year to you and your husband, over 20 years that's still just one million. What's the plan for the other millions?

Goldielocks

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Life insurance other than term is usually not a good deal. Insurance should be used to cover unexpected but life altering events (death of a wage earner before they're done earning wages), not as an investment (a place to put money until someone dies of old age). Your parents should give you the money as cash and you should invest it. If you are in a lower tax bracket or are comfortable holding the same investment I think they could transfer investments directly to you to keep the capital gains tax bite lower.

Also note that they can each give up to the annual gift limit, and they could give to both your husband and you, so that would be $56k/year. Your husband would be able to keep the gifts to him in the event of divorce, whereas if you're careful to keep it separate from joint accounts he may not be entitled to gifts given to you, so that's something to think about.

If you have or plan to have kids your parents could set up a 529 for them (in your name which can later be transferred if you don't have them yet). You'd have to check if this counts towards the gift limit if it's in your name.

Terran,

The parents are not trying to buy life insurance, they are trying to transfer assets in a tax-preferred way to their family.   Life insurance products are indeed a very good way to do this, with some controls.  Life insurance agents or brokers can describe the various products, (without cost to you), and I would get quotes from at least 2 or three different sales people, and closely compare the offerings.  Heck, you can even ask the life insurance agents how their proposal is better than the one you obtained from the other person.

Irrevocable trusts (sans life insurance) are another way.   You need to be talking about a lot of money over the years, or a need for a lot of control over what happens with it, for the legal costs to set these up to make sense to you.  However, a lawyer that specializes in them could be worth a quick consult.    This is the classic way to do what you are thinking of.

An Irrevocable inter vivos (living) trust -- allows your parents to put the money into the trust, and it is taxed within the trust, and not attributed back to them.   BUT, when created, they can state what type of investments it can be used for, everything from buying property to fixed income products, or equities (or bar different types), or even if it is allowed to be distributed to others as cash.  They assign a trustee (or themselves) to complete these instructions, and the trustee is bound by them.  As they are alive, they can continue to have a say in how the money is invested (by talking to the trustee, but only within the rules set up originally for investments).   When they die, the money usually goes to the beneficiaries, or it can remain as a trust to trickle out money to beneficiaries (there is a limit on how long it can exist, something like 80 years).

Because it is a custom trust legal document, they can cost money to set up, so are best when enough money and taxes (including probate / estate taxes)  are involved (or control wanted) to justify them.   The trust can be allowed to distribute lumps of cash to the named beneficiaries as well, at the discretion of the trustor, if set up that way.  Some people use it to buy a house for their relatives to live in, for example.

http://www.investopedia.com/terms/i/intervivostrust.asp

(note, I think that the comments about "will" in the last paragraph are incorrect / typo... if you set up an inter vivos trust, which by definition means that no one has died).
« Last Edit: April 25, 2017, 09:40:58 AM by Goldielocks »

Case

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If they bleed out 50k per year to you and your husband, over 20 years that's still just one million. What's the plan for the other millions?

I guess in that case a combination of maxed out gifts + ILIT for the rest of it is the optimal way then?  (depends on how much money it is to determine if the ILIT is worth it).