How To Maximize Your Clients Credit Shelter Trust

In some cases, your clients may have done advanced planning and funded these trusts while both individuals are alive. It may make sense to purchase second-to-die coverage in these trusts.

More likely, however, these trusts have been, or will be, funded at the death of the first spouse. In either case, the better the health of the client, the better leverage received through the life insurance.

Most client issues about using a credit shelter trust to purchase life insurance center on control or loss of access to trust funds. Clearly, the best clients for these arrangements are ones who will not need trust funds for living expenses. Nevertheless, clients may have some other questions.

Clients are often concerned that the purchase of life insurance will block these assets from use in case of an emergency. But the life insurance contract is a trust asset, just like any other. To the extent the trust allows survivor spouses and other beneficiaries access to trust assets, a trustee can use the life insurance policy cash values.

This is usually not recommended because access to policy cash values will affect the death benefit ultimately paid to the heirs. But this is also the case with any other trust distribution; removing funds from such a trust will increase a clients estate and reduce trust benefits.

Clients and trustees will often ask if the purchase of life insurance is the best use of trust assets. It is important to remember that no single planning approach is ideal for every situation. The only way to determine if the intended approach makes sense for a credit shelter trust and the beneficiaries is to do an analysis similar to the one shown in Chart One.

There are also some legal issues that need to be considered before going forward with this strategy. First, the trust document must allow for the purchase of life insurance. This can usually be discerned from a review of the document or the governing state law.

Another legal issue related to control concerns are situations where the surviving spouse is a co-trustee of the trust. This is a common practice as it often helps ease client anxiety over placing these assets in a trust. In order to avoid any risk of the life insurance death benefit being included in the survivors estate, it is recommended that the survivor resign as trustee.

While some very tight legal drafting that limits the spouses decision-making capacity and access to life insurance values may allow a spouse to remain as co-trustee, a clean separation from the role as trustee is a more conservative approach.

Finally, it is important to remember that your clients trusts will have varying amounts of assets available for planning. Although $1 million is used in this example, most client trusts will have smaller amounts available for planning.

This is due to the fact that the $1 million exemption equivalent only has been in place for a short period of time. Many trusts were funded some time ago, when the Unified Tax Credit amount was much lower. In 2001, this amount was $675,000–and that was an increase over prior years.

Additionally, some clients may not have had sufficient assets to fully fund their credit shelter trusts or they may not have properly structured the ownership of their assets to maximize funding the trusts at the death of the first spouse. Before doing any life insurance illustrations, you will want to know what amount is available for planning within a given trust.

A funded credit shelter trust can offer an attractive way to help a client, or surviving spouse, complete a segment of his or her estate plan. In many cases, life insurance may provide sufficient leverage for assets held in such a trust to boost the amount available to the heirs. With the appropriate planning and life insurance design, this approach can be an attractive concept to bring to your clients and advisors who have access to credit shelter trusts.

Mark A. Teitelbaum, JD, LLM, CLU, ChFC, is second vice president of advanced sales for Travelers Life & Annuity, Hartford, Conn. He may be contacted at [email protected].

Reproduced from National Underwriter Edition, May 19, 2003. Copyright 2003 by The National Underwriter Company in the serial publication. All rights reserved. Copyright in this article as an independent work may be held by the author.