Looking Beyond Repeal (Or Reform)

The grantor in Commito's example then uses this amount to buy a second-to-die universal life policy. At the death of the second spouse, the policy yields a death benefit of $18.3 million.

Avoidance of gift tax costs within the context of dynastic planning was also the focus a presentation by Deborah O'Neil, vice president of Paramount Planing Group, a New York-based division of AXA Financial. O'Neil cited several techniques — the grandchild's trust, "blended ILIT," non-taxable gifts trust, a solution that pairs an ILIT with the non-taxable gifts trust and the "HEET" trust — that enable clients to avoid the gift tax and the generation-skipping transfer (GST) tax.

The first method, which is for the benefit of a single grandchild, funds the trust with annual exclusion gifts that qualify as direct skips (a skip person being two or more generations below the donor or 37 1/2 years younger if not related to the donor).

The gifts purchase insurance on the grandparent's or grandchild's life. The trustee manages principal distributions and income payments to the grandchild beneficiary. Because the grandchild has a demand right (or Crummy power) over the trust asset, he or she can withdraw trust funds with incurring a gift tax.

The vehicle, said O'Neil, protects the grandchild from claims by "future creditors, predators and spouses;" and, using insurance, the assets grow tax-deferred. But she observed that other solutions are needed if the assets are to pass to multiple generations, ad infinitum.

To that end, an ILIT may be used. In O'Neil's example, each of two spouses makes gifts to the ILIT using their annual gift tax exclusion amount ($11,000 per donee). Then, tapping their combined $3 million GST tax exemption, they make additional gifts to purchase life insurance for both skip and non-skip beneficiaries.

A third option, the Health Education Exclusion Trust or HEET trust, lets individuals create a trust to pay beneficiaries' health and education expenses that qualify under IRC section 2503(e). The trust, O'Neil observed, can continue for multiple generations without invoking the GST.

But because the HEET trust would violate the rule against perpetuities for distributions that don't qualify under 2503(e), O'Neil advised creating a second trust to cover expenses not related to health and education, thereby maximizing leverage of the GST exemption.

"The best [solution] is to try a blend of trusts, taking advantage of the GST exemption only where necessary," said O'Neil. "That way, no out-of-pocket gift taxes are paid."

Another tax-advantaged vehicle for covering post-retirement medical expenses is the single-employer 419(e) plan. Debra Repya, director of advanced markets at Securian Advisor Services, St. Paul, Minn., said the plan affords employers a current income tax deduction.

Employee-participants enjoy tax-deferred grow on assets held in trust. In addition to covering post-retirement health costs (including long-term care), the plans provide a pre-retirement death benefit.

"A 419(e) plan would be a great addition to the 412(i) plan for a small, cash-rich employer who is willing to fund a benefit for employees," said Repya. "But advisors need to understand that 419(e) plans are not listed transactions. And they're not multi-employer, deferred comp plans."

Repya also endorsed the survivor standby trust, which delays putting a life insurance policy into the testamentary trust until the first death of a spouse. Before death, the policy holder enjoys full access to cash values, pays no administration expenses and makes no irrevocable gifts. Upon the second death, insurance proceeds are distributed estate tax-free.

'The best [solution] is to try a blend of trusts, taking advantage of the GST exemption only where necessary…That way, no out-of-pocket gift taxes are paid.'