MKA Executive Planners Blog

Summary

The purpose of this article is to discuss the “living benefit” aspect of life insurance.  By “living benefits” I mean its use as an alternative, non-correlated, investment component of an overall investment portfolio.  My premise is that life insurance may provide a greater total lifetime return with less market risk than a portfolio that does not include life insurance, with particular emphasis on its use by Dynasty Trusts.

Estates and trusts will be subject to a surtax of 3.8% on “Net Investment Income” if: (1) they have” Net Investment Income” and (2) (a) “Modified Adjusted Gross Income” that exceeds (b) a “Threshold Amount” ($11,950 for 2013).[1]

My prior article Investment Concerns With Taxable Trusts, addressed the new tax landscape for taxable trusts.  Subsequent to that article, on January 28, 2013 the IRS published Rev. Proc. 2013-15, the updated income tax rates for 2013.  The change resulted in a small increase in the tax brackets and an increase in the top marginal tax rate for trusts from 35% to 39.6%.  The following is an updated comparison of individual and trust tax rates.

Generally speaking, if a trust earns income (dividends, interest, rent, capital gain, etc.) either the trust or some other person is required to pay income tax.  The taxpayer will be either the trust or the grantor, during his or her lifetime.  Although the capital gain rate is the same for individuals and trusts, the income tax brackets for trusts are quite compressed; with the top tax bracket kicking in after taxable income reaches $11,500.  The focus of this article is trust income, exclusive of capital gains (Ordinary Trust Income).