Why Would I Need a Will or a Trust?
Say that some time ago– when your family was still young, and the estate tax exemption was only $600,000—you created two trusts: (1) a revocable “living” trust (RLT); and (2) an irrevocable life insurance trust (ILIT). These two trusts were designed to take care of your family after your death. However, at this point, everyone is financially independent, and the value of your estate is far less than the taxable threshold of $11.7 million (for 2021).
If the RLT is terminated after your death, the beneficiaries will get a “step-up” in basis at your death and pay taxes at their own rates, rather than the trust rate, assuming the distribution of all income items occurs after your death. Would you need a will, if all the accounts have your children as beneficiaries? The ILIT was funded with a term life insurance policy that is going to expire soon.
Nj.com’s recent article entitled “Should I terminate this trust and do I need a will?” says that there are number of issues to address. The purpose of an irrevocable life insurance trust (ILIT) is to own and control term or permanent life insurance policies, so that the policy proceeds aren’t included in the insured’s taxable estate upon his or her death. This is because if you own a life insurance policy on your death, the policy proceeds are included in your taxable estate.
While the current federal estate tax exemption amount is $11.7 million per person, the law is scheduled to expire at the end of 2025, when it will return to an exemption of only $5 million, adjusted for inflation. At this this time, it’s unknown if Congress will permanently change the proposed exemption amount, or if Congress will change when the law sunsets.
If the ILIT is funded with a term policy that is set to expire soon, it may be easier to let the policy owned by the ILIT expire, which would render the ILIT immaterial. The terms of the ILIT will govern the procedure for the termination of the trust, which may be simple or onerous. Consult with an experienced estate planning attorney to who can look more closely at the trust’s language.
A RLT lets the person creating the trust control the assets in the trust and avoid probate. It also can be used to manage the trust assets by a successor trustee, in the event the grantor who created the trust becomes incapacitated.
For example, banks located in certain states may freeze 50% of the assets in an estate at the owner’s death to be certain that any estate or inheritance taxes that may be due are paid. In these cases, a tax waiver must be obtained to lift the freeze. However, any assets in a trust, aren’t subject to a similar freeze. Fortunately, Louisiana is not one of these states.
At the grantor’s death, a trustee must pay income tax, if the gross income is $600 or more. Depending on the amount of assets in the trust, the trust may not accumulate gross income of $600, if the assets are distributed outright to the beneficiaries right after the death of the grantor.
Lastly, it’s wise to have a will, even if the majority of assets are in a living trust or are in IRAs and other retirement accounts. That is because there may be some assets that are outside the trust or retirement account or there may be a need for a personal representative of the estate to handle tax or other types of refunds.
To learn more about estate planning, read these articles: Why Do Families Fail when Transferring Wealth? and What Do Elder Law Attorneys Do? and How Do I Hire an Elder Law Attorney? and What Is Income in Respect of a Decedent?
Reference: nj.com (June 15, 2021) “Should I terminate this trust and do I need a will?”