Estate Planning/Divorce:
IRREVOCABLE LIFE INSURANCE TRUSTS FOR DIVORCE PLANNING

For estate planning clients, we often recommend irrevocable life insurance trusts in order to create a funding pool to pay an estate tax bill or, at a minimum, to convert assets that would otherwise be taxed in the estate of the decedent to assets that would not be included in the taxable estate of the decedent.

Often clients are unwilling to accept the fact that the death benefit of a life insurance policy, when not purchased through a certain type of trust, is included in the taxable estate of the decedent. To avoid this onerous result, we simply set up irrevocable life insurance trusts ("ILIT") naming someone other than the grantor as the beneficiary. This way, upon the death of the grantor, the death benefit is not included in the taxable estate.

With respect to divorce planning, Section 503(g) of the Illinois Marriage and Dissolution of Marriage Act clearly permits the court to establish a trust or a separate "fund" from a portion of the jointly held assets "to protect and promote the best interests of the children." However, Section 503(g) trusts can be ordered only if the court finds that a trust or a separate fund is necessary to protect or promote the best interests of the children. Facts necessary to give rise to a court order for a Section 503(g) trust are when there has been a history of payment problems or otherwise irresponsible behavior. Section 510(d) of the Illinois Marriage and Dissolution of Marriage Act provides that a parent's support obligations continue after death: the deceased parent's estate is responsible for any support obligation ("to the extent just and appropriate in the circumstances"). Nonetheless, the court has the authority to order a party to maintain life insurance only during the period for which that party is obligated to make payments. In re Marriage of Rogliano, 198 Ill. App. 3d 404 (1990). As a very practical negotiating matter, simply purchasing a life insurance policy does not resolve sufficient issues. For example, when the proceeds are paid in a lump sum, will there be enough money? Who will manage it? How will the proceeds be invested? How will they be used? How will the custodial parent be able to use the money for the benefit of the child? If the child can access the money at age 18, what will guarantee that the funds will be used to pay for college?

It is well advised that ILIT offer a creative solution to secure the child's support and answer the above questions. Divorce lawyers should consider the following in the life insurance trust discussion analysis: (1) what type of life insurance (term, whole life, universal life); (2) how often should the responsible person make premium payments to the trust; (3) the child's age should reflect the necessity of the death benefit -- usually, the older the child, the less the death benefit needs to be; (4) who will be named as the trustee, the successor trustee, and always, institutional trustee; (5) provide that the trustee use the life insurance proceeds to make all child support payments that would have been made had the obligor lived; (6) negotiate the education requirements of the trust -- is college and post-graduate education included? when will the trust be liquidated?

At a minimum, the analysis required to draft a proper ILIT raises the level of understanding between the parties regarding the support of the minor children.

This newsletter is a publication of Lavelle Legal Services, LTD. We attempt to highlight and discuss areas of general legal interest that may lead to planning opportunities. Nothing contained in this Newsletter should be construed as legal advice or a legal opinion. Consultation with a professional is recommended before implementing any of the ideas discussed herein.