Estate Equalization

     Quick. If your family is a blended family, would you rather disinherit your new spouse or your own children? Without proper planning it likely will be one or the other. Either way it is a lose-lose proposition.
     Alternatively, what if you could create a plan that actually may increase your overall estate value, without increasing your estate value for death tax purposes, and may allow you to equalize the inheritance left to your new spouse and to your own children?

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 an 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).