Page 23 - June2019_BarJournal

ESTATE PLANNING

this power. The power of substitution allows trusts. Depending on the ILIT language, it may policy may be donated to charity. This can
the grantor to direct the substitution of the allow the trustee to adjust the trust terms for occur through many of the mechanisms outlined
policy for the fair market value of the assets. beneficiary distributions. above. For example, if the trust allows for the
The grantor then owns the life insurance policy. addition of charitable beneficiaries, the power
If the old ILIT contains terms for one or more Enter into a Private Settlement Agreement to add those beneficiaries may be exercised,
beneficiaries the individual no longer wants to Similar to decanting, the trustee and and the charity is listed as the sole beneficiary.
benefit, the power of substitution may be a way beneficiaries enter into an agreement under Alternatively, the policy may be taken out of the
to get the policy out of the old ILIT, without ORC Section 5801.10. This technique is helpful ILIT, either through purchase or substitution
the trustee being concerned about the breach to clarify trust provisions, outline successor for fair market value, and the policy may then
of a fiduciary duty. The trustee cannot refuse trustees, and include missing terms. If the be contributed to charity.
the individual grantor’s exercise of the power trustee of the ILIT is the individual’s trusted ILITs are still important for many families.
to substitute. There will still be the fair market advisor, and the children of the individual are Now that the estate tax rules have changed, it is
value of the policy in the ILIT, but that amount now the appropriate age to serve as trustee, important that the ILITs are revisited to make
would generally be less than the death benefit. this mechanism allows for the children to serve sure they continue to meet a family objectives,
as trustee. The difference between a private and if not, to determine the best way to proceed.
Liquidate the policy and the ILIT settlement agreement and decanting is that in
If it is determined the purposes of the ILIT decanting, the trustee only needs to notify the
do not fit the family, and the policy no longer beneficiaries of the action, whereas, a private Katherine E. Wensink is an
makes sense, there are two ways to terminate settlement agreement requires the beneficiaries attorney in the Tax and Benefits
the policy: to consent to the agreement. Group of McDonald Hopkins LLC.
1. The trustee can surrender the policy to She has been a member of the
the life insurance company for the current Contribute the Policy to Charity CMBA since 2003. She can be
cash surrender value. When the original purposes no longer exist, reached at 216-348-5729 or kwensink@
2. The trustee can sell the policy to a third and the individual is charitably inclined, the mcdonaldhopkins.com.
party in a Life Settlement. In this situation,
the third party will pay more for the policy
based on the insured’s life expectancy, the
value of the policy, and several other factors. Helping you navigate
In some circumstances, a Life Settlement can
pull more value from a policy than simply
surrendering or reducing the policy to paid through difficult
up value.
If the policy is liquidated, then, depending
on the terms of the ILIT, the trustee can financial issues.
invest the proceeds and continue the trust or
terminate the trust, and distribute the assets to Our experienced • Economic Damages
the beneficiaries in accordance with the trust
terms. If the priority has shifted from estate financial experts • Fraud Investigation & Deterrence
tax to education, this is often a way to fund will help your • Valuations for Estate & Gift
the education of beneficiaries, as the ILIT now • Business Valuations
holds liquid assets. clients with:
• Insolvency & Restructuring
Decant the Trust
When the life insurance policy still makes Jeff Firestone, CPA, CFE, CVA
sense, but the terms of the trust do not, the
ILIT may be decanted under the terms of ORC Director of Litigation Services
Section 5808.15. Decanting occurs when a PHONE 440-892-8900 ext. 113
new trust is created (or a preexisting trust that
better meets the needs of the family), and the EMAIL jeff@mcmanamonco.com
trustee pours the proceeds of the ILIT into the WEB www.mcmanamon.com
new trust. The rules are very restrictive, so it
is important to follow the exact procedure.
Additionally, the IRS has not yet given guidance
as to decanting. If decanting is appropriate,
this may allow the merger of one or more old
June 2019 Cleveland Metropolitan Bar Journal | 23