Gifts made to a trust to pay life insurance premiums - considered "gross income" to the trust or not?

I am aware that if a trust has any taxable income or $600 in gross income, a Form 1041 must be filed for the trust each year.
My question is, if a trust is the beneficiary of a life insurance policy, and the grantor of the trust pays the life insurance premiums every year as gifts to the trust, are these gifts considered part of the trust's "gross income" that must be reported on the 1041?
I have a client with a life insurance trust that is the beneficiary of the policy. He will be paying the life insurance premiums to the trust every year and they may total more than $600. Can he call these premiums a gift, and if so, are they considered part of the trust's gross income?
Chris Johnson, EA
Reply to
Normally such payments are considered gifts and not income.
Is the trust a life insurance trust (ILIT)? If so, any taxable income of the trust would probably be attributible to the beneficiary of the trust rather than the trust itself.
If it is any other kind of an irrevocable trust (other than an intentionally defective one), such gifts will need to be reported on a gift tax return, even if they are less than the annual exemption amount.
The trust should also be the owner of the policy.
Again, the payments would likely be considered gifts and not taxable (gross) income.
Reply to
Stuart A. Bronstein
Hi there,
Thanks for your reply. It is a life insurance trust which will own the life insurance policy, its only asset. The only gifts being made to the trust are the payment of the life insurance premiums. The trust wouldn't have any income, the whole life policy would just increase in value over time.
So, based on your previous answer, it seems that if the only money going into this trust are life insurance premiums which are being treated as gifts, then there would be no need to file an annual 1041 form, correct?
Thanks again!
Reply to
The trust would have no taxable income. Whether or not a 1041 should be filed may be another story, and I will leave that up to the people who do returns - I don't.
In the normal insurance trust, the beneficiary is given 30 days to withdraw the gift from the trust, and it can only be used to pay insurance premiums after that 30 days elapses or the beneficiary waives his right to withdraw.
As to any portion of the trust that the beneficiary could have withdrawn money but did not, the trust is considered a grantor trust and the beneficiary, not the trust, is taxable on any taxable income the trust may have. This does not seem to be an issue at the moment, but at some point it may well.
Reply to
Stuart A. Bronstein

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