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Note: Nothing in this publication is intended or written to be used, and cannot be used by any person for the purpose of avoiding tax penalties regarding any transactions or matters addressed herein. You should always seek advice from independent tax advisors regarding the same. [See IRS Circular 230.]

Content: Copyright © Integrity Marketing Solutions

Volume Ten Number Five May 2013


Estate Equalization

Estate Equalization    If your family is a blended family, one of your estate planning challenges is to make sure each member of your blended family is treated fairly and equitably. You will want to make consideration for your current spouse, your own children and perhaps even your stepchildren. And “fair and equitable” does not always result from a simple “equal shares” approach. Not to mention that some assets, such as a family or vacation home, are quite difficult to split into “equal shares.” In some cases, you may want to create a plan that actually increases your overall estate value, without increasing your estate value for estate tax purposes, and may allow you to equalize the inheritance among your family beneficiaries.

First Things First

    Before continuing, however, you should know that your insurability for life insurance is the financial planning key to making this win-win inheritance arrangement work. It is an age-old financial planning maxim that your health actually buys your life insurance and your wealth merely pays the premiums. Assuming you are insurable, we now turn to the legal planning.

Your New Spouse

    To provide financial security for your new spouse and to minimize your estate tax exposure, arrange for a tried-and-true Estate Tax Exemption Trust (ETE Trust) and a Qualified Terminable Interest Property Trust (QTIP Trust) to be created under either your Last Will and Testament or your Revocable Living Trust. Through this arrangement you may maximize your estate tax savings as you provide income and even principal to your new spouse for life. Thereafter, upon the death of your new spouse, the assets of both Trusts may pass to your own children

Your Own Children

    Having taken care of your new spouse, we now shift our focus to providing a concurrent inheritance for your own children.
    First, you create an Irrevocable Life Insurance Trust (ILIT) with your own children as the beneficiaries. Select the amount of life insurance that will represent their inheritance upon your death, according to your estate equalization goals. Note: While you may not serve as a Trustee, you may select the current and successor Trustees.
    Second, you make gifts to the Trustee on behalf of your beneficiaries in an amount roughly equal to the insurance premiums. The Trustee then provides written notice of the completed gift to each ILIT beneficiary, giving each a designated period of time (not less than 30 days is typical) to request distribution of their respective share of the gift. After the designated period has lapsed, the Trustee applies for the appropriate amount of Life Insurance and pays the initial premium. [Note: This annual gifting ritual continues until your death.]
    Third, assuming all of the ILIT steps have been followed, the death benefit will be estate tax free when paid to the ILIT for your own children. Properly structured, this inheritance will be protected both for and from your own children, as well.
    Later, upon the death of your new spouse, the assets of the ILIT may be merged with the assets of the ETE Trust and the QTIP Trust for more economical and efficient administration for your own children (and even grandchildren).

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