How was the trust taxable on the gain? It's possible but difficult to have an insurance trust be its own taxpayer....
I did this [terminated my ILIT] in 2019. It followed the "Terminate the ILIT Altogether" section in the article. In particular, I did number 3, i.e. "Consent Termination by Grantor and Beneficiaries".
The law firm charged about $5k for the Termination Agreement. I felt I was getting ripped off, but decided I didn't have much choice. I think it was unlikely to find a different reputable law firm that would do a good job and charge a lower fee. In fact, this is such a rare event, I don't think I would know when a law firm did a good job or not.
After the termination agreement was signed and notarized by the beneficiaries and the grantor [me], the whole life policy was surrendered for its cash value. [The ILIT trustee is one of the beneficiaries.] The cash value proceeds were sent to a bank account in the ILIT's name.
The ILIT paid about $10k in taxes [Form 1041] on the gains from the life insurance investments. Then the proceeds were distributed to the beneficiaries. This took a year. Some proceeds were distributed early to the beneficiaries, but the ILIT has to keep enough cash to pay the taxes, lawyer, and other expenses.
My ILIT did not have any loans. A projection by Nationwide said the cash value went to 0 if I lived to 89 [because I was paying the premiums from the policy's cash value]. I thought it was in my kids' best interests for them to get the money now. I still think it was the right decision.
You are correct that a grantor may amend or revoke a trust with the consent of the adversely affected beneficiaries. You could do this with a simple document whereby the grantor says he/she amends the trust as follows, and having the beneficiaries sign it. That option usually isn't available if the trust will end, since there's usually at least one minor beneficiary such as a grandchild who can't consent. But occasionally there aren't any minor beneficiaries. Or you can amend the trust in a way that doesen't adversely affect the interests of the minors.
But if you want to terminate the trust and distribute the proceeds to the children, couldn't the trustees have simply distributed the trust assets to the children? (Since the trustee was a child, you would have needed a trustee other than a child to make that distribution, but the trust should have given either you or the trustee the power to add a co-trustee.)
As to the legal fees, in addition to the drafting, the law firm had to review the trust agreement, consider the choices, and make a recommendation.
Statistics: Posted by bsteiner — Sun May 05, 2024 9:13 pm — Replies 10 — Views 687