Life-insurance trust

I am in my early 50s and have accumulated a net worth of about $3million, much of which is in real estate that I hope to pass on to my children. Recently, I met with an estate-planning attorney to review my wills. He recommended that I establish an irrevocable life-insurance trust to shield life-insurance proceeds from federal and state death taxes. Do you think this is a good idea?

Charles Blair, DDS

John McGill, MBA, CPA, JD

I am in my early 50s and have accumulated a net worth of about $3million, much of which is in real estate that I hope to pass on to my children. Recently, I met with an estate-planning attorney to review my wills. He recommended that I establish an irrevocable life-insurance trust to shield life-insurance proceeds from federal and state death taxes. Do you think this is a good idea?

Creating an irrevocable insurance trust and naming it as the owner and beneficiary of all life-insurance polices can produce substantial estate-planning benefits for your family. First, all life-insurance proceeds will be exempt from federal and state death taxes. This exemption is immediate if the trust takes out a new life-insurance policy on you naming itself as owner and beneficiary. In the event a current policy is assigned into the trust, the proceeds will escape federal and state death taxes only after a three-year waiting period expires.

An irrevocable life-insurance trust can provide other benefits as well. Proceeds held within the trust will avoid the cost and delays associated with probate. Moreover, using a life-insurance trust will help maintain privacy, since the existence of the policy need not be disclosed for probate purposes. Furthermore, the proceeds are exempt from the claims of creditors. Finally, the trust provides an ideal mechanism through which to provide professional management for these assets for the protection of your children.

Several disadvantages must be considered as well. First, there is some cost and complexity involved in establishing the trust arrangement. Also, any cash buildup inside the policy cannot be accessed if the policy is held by the trust. Furthermore, the policy proceeds cannot be paid directly to the estate, nor can they be used directly to pay your estate-tax obligations. However, the trust can purchase assets from your estate, thereby providing the cash necessary to pay death taxes, which would allow you to avoid having to sell the real estate to pay the taxes due at your death.

I have operated an unincorporated general dental practice for over 20 years. I have four employees in addition to my wife, who works as an office manager. My accountant has advised that I not pay my wife in order to avoid payroll taxes. Do you think this is a good idea, or am I missing out on some tax breaks here?

We would recommend that your spouse be compensated for her duties with the office to obtain a variety of tax benefits. The spouse must be a paid employee to qualify for fully deductible business-travel expenses under Section 274 (m)(3). Also, the IRS recently ruled that, by covering a spouse and family, an unincorporated doctor may be able to fully deduct health-insurance premiums, without being subject to the 60 percent deduction limitation generally imposed on self-employed doctors.

Employing a spouse can help qualify him/her for Social Security benefits, as well as the child-care tax credit. Also, there are substantial benefits for those doctors operating a SIMPLE-IRA retirement plan in their practice. Through paying the spouse $6,500 and having the spouse elect to defer a maximum of $6,000 from his/her pay, a family may be able to generate as much as $18,195 of tax-deductible contributions for the doctor and employed spouse. The maximum staff funding costs would be only 3 percent of pay.

As you can see, recent tax-law changes have significantly increased the tax benefits associated with employment of the spouse in the dental practice.

Dr. Blair (left) is a nationally known consultant and lecturer. McGill is a tax attorney and MBA. They are the editors of the Blair/McGill Advisory, a monthly newsletter helping dentists to maximize profitability, slash taxes, and protect assets. The newsletter ($149 a year) and consulting information are available from Blair/McGill and Company, 2810 Coliseum Centre Drive, Suite 360, Charlotte, NC 28217 or call (704) 424-9780.

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