Transferring an existing life insurance policy to a Life Insurance Trust without getting anything in return is a gift. If healthy and insurable, the value of the gift will be the cost to replace the insurance policy. If the insured is uninsurable, the policy’s value will be substantially higher.
The typical way to transfer funds to a life insurance trust is by utilizing the $16,000 (per donee) annual gift tax exclusion. However, in the life insurance trust context, you must provide the beneficiaries with the ability to withdraw some of the funds because the gift tax exclusions do not apply to future gifts (it must be present).
Thus, there are concerns when a life insurance trust does not have other assets and the policy has no cash value because it is likely that such a withdrawal power is illusory (there are not enough funds to pay if a beneficiary makes a withdrawal request). Although there is not much evidence showing that the IRS has attempted to go after such infractions, it is something to keep in mind when funding a TOLI.
