IDGT: The Multi-purpose Tool for an Integrated Financial Plan

In my previous post I provided a brief history of IDGTs, the applicable exclusion amount and the need for a trust to be the owner and beneficiary of a life insurance policy on the life of the grantor. The primary reason for trust ownership was to remove the death benefit from the taxable estate. However, as a result of American Taxpayer Relief Act (ATRA) of 2013, this reason was eliminated due to the applicable exclusion amount being raised to $5,250,000. An additional benefit of a properly drafted IDGT is asset protection for the trust corpus.

The trust may hold assets used to pay the insurance premiums on a life insurance policy, which insures the life of the grantor. This is one of the requirements necessary for a trust to be considered intentionally defective. A properly drafted IDGT allows the grantor access to the trust assets either through themselves or a non-donor spouse (spousal lifetime access). Having these assets inside of the IDGT trust provide asset protection for the beneficiaries and the grantor!

Whole Life insurance cash values are an excellent tool in an integrated financial plan. If the values inside of the policy are held in an IDGT, this is even better. The cash values can be an emergency reserve fund for the grantor. Additionally, the values may also act as a reserve for unexpected and unanticipated events. An example would be the needs of adult children for a down payment on a home or capital to start a business.

Many of our clients refer to this strategy as a ‘private bank.’ A loan is made from the insurance policy to the trust. The trust then lends money to the adult children. The loan is paid back to the trust, and the trust then repays the loan to the insurance company. Thus, the grantor does not have to access investments outside the trust and therefore, avoids taxable gain or loss.

The trust’s beneficiaries are also protected from what I refer to as ‘predators and creditors. One of my clients refers to these individuals as ‘vultures.’  At death, the survivors are at their most vulnerable. Unfortunately, many in society prey on survivors and ensnare them into various financial schemes. A properly drafted IDGT would protect the survivors from such entrapment.

Yes, the applicable exclusion amount has been raised to $5,250,000 and for many there is no longer a need to plan around the estate tax. However, there continues to be a need for an IDGT in an integrated financial plan.

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