Hi Andrew,

I am a new attending physician and my spouse and I currently have limited assets (<$1mil), but are contemplating purchasing rather large term life insurance policies to protect our children if we die. Since we live in a state where any assets over $1mil per person are subject to estate tax, we are wondering whether it makes more sense to establish a marital A/B trust, an irrevocable life insurance trust, or simply transfer ownership of the life insurance policies to a third party. I would appreciate your thoughts on this. Many thanks for this informative board.

Good question. Unfortunately, I don't know the answer to this one, since my firm doesn't deal much with estate and gift taxes.

I recommend that you contact an estate planning attorney licensed in your state to help you determine the best way to hold your life insurance policies. It might cost a little money right now, but you could save thousands of dollars in estate taxes down the road by getting everything set up properly now. Ask your peers if they have worked with anyone who is both knowledgable and reasonable with their fees.

Come to think of it, if you are married and have kids, you should have already met with an estate planning attorney to have your wills drafted. (If you haven't, I recommend that you put that on your to-do list for this spring.) You might as well contact this person regarding the issue of your life insurance.

Zip Code: 01801

Confused, using a marital (A-B) Trust in your will coupled with an ILIT for a large term life insurance policy is a great idea.

However, you must make sure that you do not apply for the insurance persoanally. The trustee will apply for the policy on your life and the owner and beneficiary of the policy will be the ILIT.

You will then gift the money to the trust to pay the premiums. As I am sure that you have been advised, if you decide to transfer any existing coverage that is personally owned to the trust, it will be subject to the three year "contemplation of death" rule and will not be considered to be out of your estate unless you live three years past the date of the transfer.

Hope this helps.

Zip Code: Lkeller@physicianfinancialservices.com

Hi Larry,

Thanks for your response (you too, Andrew!). Larry, you mentioned that the trustee of the ILIT must apply for the term life policy. Can I do the initial medical exam and get a firm policy offer and rate determination in my own name before the ILIT is officially formed or does this all have to wait and be done in the trustee's name? Also, I was told that it might be possible to avoid the expense of creating an ILIT by simply cross-transferring ownership of my life insurance policy with my spouse. How would this work? Thank you very much for your thoughtful answers. I always enjoy your insights on this board.

You can submit an application for underwriting purposes in your own name and advise the company that the policy should not be issued and that a new application (trust owned) will follow.

You can use the same exam, blood and urine tests if you apply within the company's time frame and the medical requirements are still good (generally 3-6 months from date of the exam).

Having your spouse as the owner of the policy is not a good idea as estate taxes will still be due upon her death (if your estate exceeds the unified credit) and she outlives you.

What happens if you were to die together? Again estate taxes would be due.

Having an ILIT own the policy removes the insurance from both of your estates. If you are concerned about potential estate taxes, the cost of the ILIT is a small price to pay relative to the savings it will provide to your family.

Zip Code: Lkeller@physicianfinancialservices.com