Lets assume that Harry and Wilma, both 65 years old, have a $3 million estate and have made no taxable gifts. Further, lets assume that the estate is evenly divided between Harry and Wilma. In 2004, Harry dies and his portion passes to his exemption equivalent trust. Therefore, $1.5 million is in Harrys B trust. Wilma is entitled to receive income from the trust and discretionary distributions of trust principal. Harry and Wilmas two children, Emily and Paul, are named as the beneficiaries of Harrys exemption equivalent trust.

Wilma has $1.5 million in assets and is comfortable with the income generated by her assets held outright. The trustee determines that purchasing life insurance on Wilmas life is appropriate. The trustee purchases a $500,000 universal life insurance policy with no lapse guarantees for $15,000 per year, scheduled for 15 years.

If Wilma dies in 2004 or early 2005, Emily and Paul will inherit approximately $3.5 million free of federal estate tax instead of $3 million. Harrys B trust, originally funded with $1.5 million, created leverage with respect to the original funds and now has the insurance proceeds of $500,000, for a total of approximately $2 million. Additionally, Wilmas $1.5 million constitutes her exemption equivalent amount, which also pass to Emily and Paul free of federal estate and gift taxes.

–Brett W. Berg


Reproduced from National Underwriter Edition, May 14, 2004. Copyright 2004 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.