Flexibility in Life Insurance Trusts

Sebastian V. Grassi, Jr. (Grassi and Toering, PLC, Troy, Michigan) has recently published his article Drafting a Flexible Irrevocable Life Insurance Trust, 31 ACTEC J. 208 (2005) [link requires ACTEC membership], in which he discusses nineteen ways to provide flexibility to irrevocable life insurance trusts:

• Permit the donor to vary annual Crummey withdrawal rights.
• Use tiered Crummey withdrawal rights.
• Give contingent remainder beneficiaries a vested interest in the trust.
• Apply the 5×5 safe harbor lapse amount against the entire trust estate.
• Create an ordering or aggregation rule for a donee’s multiple withdrawal rights.
• Appoint a special powerholder.
• Include contingent marital deduction provisions.
• Be aware of the transfer for value rule and income taxation of life insurance proceeds.
• A defective grantor trust may be more effective.
• Give beneficiaries a testamentary limited power of appointment.
• Give the grantor, the grantor’s spouse, and the beneficiaries the ability to remove and replace the trustee.
• Give the trustee broad discretion to satisfy Crummey withdrawal right notice requirements.
• Give the trustee broad power to satisfy any Crummey withdrawal right.
• Permit the trustee to appoint a guardian for minor Crummey withdrawal right beneficiaries.
• Permit the trustee to amend Crummey withdrawal rights.
• Permit the trustee to make discretionary distributions to beneficiaries.
• Permit the trustee to terminate the trust.
• Permit the trustee to move trust assets and change the situs of the trust.
• Permit the trustee to extend the trust beyond the Rule Against Perpetuities.

Note that sample provisions are provided for many of the suggestions.