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In 1994, a healthy couple ages 53 and 51 purchased a Universal Life death benefit of $7,400,000, which - using the annual gift exclusion for joint gifts to two trust beneficiaries - was as much home insurance as $40,000 a year would provide. A second-to-die Universal Life policy in an irrevocable home insurance trust with anticipated funding premiums of $40,000 per year appears to have insufficient funding to sustain the policy for all years, but tax-effective gifts are limited. For example, her death benefit at age 85 would be approximately $620,000 and at age 95 approximately $558,000. The death benefit would continue to increase through 2010 to approximately $729,000, and would then begin to drop. Using the current dividend scale, this would require paying seven more yearly premiums, making her 65 years old before dividends could take over the premium-paying burden for the balance of her life. A final variation on these themes is to continue paying the full premium of $20,576 until the projection calculates that dividends can entirely take over the current premium payments. The insurance company should be consulted to determine the maximum reduction in death benefit that does not trigger a taxable gain. If the insureds live long enough, undulating interest projections suggest the policy could achieve a higher ultimate death benefit. Reduce the death benefit to $4 million, adjusting the policy so it returns to its theoretical cash value curve. Even though eligible annual gifts could increase to $44,000 in 2004, the grantors were definitely not anticipating a 150 percent increase in their gifts - nor can they increase the gift to that level without using their lifetime exemption.

Increase funding premium as presented. The policy crediting rate is currently 4.75 percent (the guaranteed rate is 4.5 percent). The interest crediting rate on their policy was 7 percent and the death benefit was calculated with that assumed rate.