Copyright (c) 2014 The Virginia Tax Review Association
Virginia Tax Review
ARTICLE: RUBIK'S CUBE AND TAX POLICY: PROPOSED SOLUTIONS FOR PUZZLING COMPONENTS OF ESTATE PLANNING WITH LIFE INSURANCE
Virginia Tax Review
33 Va. Tax Rev. 429
Kelly A. Moore*
A taxpayer's face may present a puzzled visage after hearing the attorney explain the transfer tax-driven steps associated with incorporating life insurance into the taxpayer's estate plan by establishing an ILIT. The advised planning can be complicated and burdensome, but may result in the estate tax-free transfer of life insurance proceeds upon the death of taxpayer and the taxpayer's spouse. 1 Moreover, the planning may allow the ILIT to be funded without imposition of the gift tax. The cost of this tax-free result can be high, comprised of attorney fees and other administrative expenses and efforts. 2 The steps are sanctioned by the Internal Revenue Code (Code), and in essence, allow estate planners to sell dispensation from life insurance-related transfer tax consequences. 3 Is it appropriate that the relevant provisions in the Code allow estate planners the tools necessary to provide this divine result? 4
Considering the appropriateness of tax law enactments involves discussions of sometimes competing tax policy pronouncements to determine if a proper balance has been struck between them. 5 This article questions the balance struck regarding certain estate and gift tax provisions involving ILITs, concluding that improvement is possible. The article proposes allowing taxpayers the benefits associated with creating ILITs, without requiring them to incur the expense currently associated with doing so.
Introductory textbooks on the federal tax system inform students that the principal criteria for evaluating any tax system are "fairness, efficiency, and simplicity." 6 Fairness is discussed in terms of ...
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