Irrevocable Life Insurance Trusts, and especially Intentionally Defective Grantor Trusts, are almost always the best way to go when life insurance (both single life and 2^nd-to-Die) is being purchased to pay estate taxes.

However, very few trusts that I’ve seen, even those prepared by high-powered (and priced) estate planning attorneys are really well-drawn to accomplish the desired purposes without potentially serious problems somewhere along the line.  This makes it extremely important to at least try to get a copy of an existing trust ASAP if there is one, or to see a draft of a new trust before it is executed.

But that’s just the beginning, in 2 cases in the last 2 days, I have experienced problems with the way money gets into a trust and then to the insurance company, so I thought it would be a good idea to set forth the proper procedure:

1. Whoever is making gifts to the trust (or more properly stated, to the beneficiaries of the trust via the trust) should make their check payable to the trustees of the trust, “as trustees”, not as individuals.

2. The trustees should have their own bank account as trustees and should deposit the check into that account.

3. The trustees should then make out their own trustee check for the amount of the premium payable to the insurance company.

It used to be that this procedure could be shortened and simplified by having the trustees endorse over to the insurance company the check they receive from the donor(s), but at least one carrier (AXAEquitable) now considers that to be a third-party check and will not generally accept it (I was able to get an exception in our case, but I wouldn’t count on that happening again).

The key here is to establish a CLEAN PAPER TRAIL.

Please do not conclude that this is all that needs to be done when dealing with ILITs, because there are other required procedures that need to be followed under the “Crummey” withdrawal rules in order to qualify gifts for the gift tax annual exclusion.

        Bob