What is an Irrevocable Life Insurance Trust?

The threshold for each state’s estate tax needs to be considered, when the family is doing estate tax planning. This is because many are not as high as the current federal estate tax exemption. As part of an overall estate planning strategy, says JD Supra in the article “Estate Planning: The Irrevocable Life Insurance Trust,” an Irrevocable Life Insurance Trust, or ILIT, can be used to take the life insurance proceeds out of a donor’s taxable estate. One catch: the donor (the owner of the policy) must live for three years after the policy is transferred to the trust, in order for the proceeds to be excluded from the estate for any estate taxes.

The donor should also not be the trustee and may not retain any economic benefits from the policy, including the ability to change beneficiaries, to cancel or surrender the policy or to assign the policy.

If the donor is married, the surviving spouse may be a trustee, but should not be the sole trustee for most situations. A family member, or even a professional trustee, may serve as a co-trustee with the spouse.

The terms of the ILIT provide for the funds to be distributed to beneficiaries, or they also may be linked to another trust. That might be a Special Needs Trust or a Revocable Trust.

An ILIT also offers a level of asset protection to beneficiaries from creditors.

The ILIT pays policy premiums through gifts made to the trust. These gifts, it should be noted, do not qualify for the current $15,000 annual gift tax exclusion, unless the beneficiaries of the trust are given some very specific powers that will allow them to withdraw the gift to the trust for a period of time. These powers are known as “Crummey” powers. The trustee in this case must send “Crummey” notices to all the beneficiaries telling them about their withdrawal rights, when there is a contribution to the trust. An estate planning attorney will be needed to create and manage this.

An ILIT can be funded with term or permanent insurance that is in effect for the owner’s lifetime. To pass the proceeds outside of the donor’s estate, the donor may not borrow against or access the cash value of the insurance policy, once the life insurance policy has been transferred into the ILIT. However, the donor could indirectly benefit from the cash value through his or her spouse, who is a beneficiary of the ILIT.

Another way to use an ILIT is to establish it by a married couple and fund it with a second-to-die life insurance policy. The second-to-die policy pays out to the surviving spouse’s death and is often used as cash to pay estate taxes on illiquid assets or to fund a special needs trust.

Reference: JD Supra (Jan. 21, 2019) “Estate Planning: The Irrevocable Life Insurance Trust”

 

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Should I Use an Online Will Service?

More than 50% of Americans don’t have a will, according to a 2017 survey by Caring.com. Spelling out how your assets should be divided, is an essential start to estate planning that can be easily overlooked.

A U.S. News & World Report’s article asks “Should You Make a Free Will Online?” According to the article, before writing your will or using an online service, you need to know the legal requirements in your area. In many instances, this is best left to a legal professional in your state.

There are plenty of online tools that will help you create a will. However, before clicking on a website’s promise, you need to evaluate the available options. There are three main ways to write a will:

  1. Do it yourself;
  2. Use a do-it-yourself program; or
  3. Get help from a qualified estate planning attorney.

If you draft a will on your own, you’ll need to be absolutely certain you understand all of the applicable probate, tax and property laws. People who’ve written their own wills are usually those with very basic estates, like a person with a single piece of real estate and a small amount in basic checking accounts.

If you use an online service, you’ll have access to software that walks you through the process. In this case, you’ll need to be sure that the software company has all the applicable laws covered, as required for your state. You also want a program that lets you make updates later, if your situation changes.

However, if you engage the assistance of an experienced estate planning attorney, you’ll have the opportunity to have an expert help you think through the details. This result will be a well-drafted comprehensive estate plan. Yes, it will cost a bit more, but for many situations—like those with blended families, complex investments, or property in several states—it’s worth it.

Remember that the probate laws can vary widely from state to state. For example, the basic form requirements may allow a handwritten will in some states, but in other states the will must be typewritten. Some states require only two witnesses, and others require that the will be witnessed, notarized and typed.

If you have a larger estate or heirs with medical conditions, it may be wise to work with an attorney who can counsel you on the best solutions for your situation. For example, if you have a child with special needs receiving government benefits, you should have an attorney create a trust so their inheritance doesn’t negatively impact their benefits.

You should also use an attorney if you want to reduce your exposure to probate fees. Some people transfer their assets into a revocable living trust, so they are not subject to probate fees. An online service can’t give you this type of attention or personalized service.

If you have a complex situation, you may end up paying less by using an attorney. An experienced estate planning attorney has helped numerous families. He or she can offer insight into setting up guardians for minor children or appointing an individual to be in charge of the distribution of the estate. There are frequently estate and gift tax considerations about which the average person doesn’t know or monitor.

Reference: U.S. News & World Report (January 9, 2019) “Should You Make a Free Will Online?”

 

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How Do I Set Up a Trust?

Trust funds are often associated with the very rich, who want to pass on their wealth to future heirs. However, there are many good reasons to set up a trust, even if you aren’t super rich. You should also understand that creating a trust isn’t easy.

U.S. News & World Report’s recent article, “Setting Up a Trust Fund,” explains that a trust fund refers to a fund made up of assets, like stocks, cash, real estate, mutual bonds, collectibles, or even a business, that are distributed after a death. The person setting up a trust fund is called the grantor, and the person, people or organization receiving the assets are known as the beneficiaries. The person the grantor names to ensure that his or her wishes are carried out is the trustee.

While this may sound a lot like drawing up a will, they’re two different legal vehicles.

Trust funds have several benefits. A trust can reduce estate and gift taxes and keep assets safe. With a trust fund, you can establish rules on how beneficiaries spend the money and assets allocated through provisions. For example, a trust can be created to guarantee that your money will only be used for a specific purpose, like for college or starting a business.

A trust fund can also be set up for minor children to distribute assets to over time, such as when they reach ages 25, 35 and 45. A special needs trust can be used for children with special needs to protect their eligibility for government benefits.

At the outset, you need to determine the purpose of the trust because there are many types of trusts. To choose the best option, talk to an experienced estate planning attorney, who will understand the steps you’ll need to take, like registering the trust with the IRS, transferring assets to the trust fund and ensuring that all paperwork is correct. Trust law varies according to state, so that’s another reason to engage a local legal expert.

Next, you’ll need to name a trustee. Choose someone who’s reliable and level-headed. You can also go with a bank or trust company to be your trust fund’s trustee, but they may charge around 1% of the trust’s assets a year to manage the funds. If you go with a family member or friend, also choose a successor in case something happens to your primary trustee.

It’s not uncommon for people to have a trust written and then forget to add their assets to the fund. If that happens, the estate may still have to go through probate.

Another common issue is giving the trustee too many rules. General guidelines for use of trust assets is usually a better approach than setting out detailed rules.

Reference: U.S. News & World Report (November 8, 2018) “Setting Up a Trust Fund”

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