A comprehensive estate plan will work toward achieving numerous interrelated goals that accomplish far more than just planning for the distribution of your estate assets after your death. To accomplish those various goals, you will likely need to make use of numerous and varied estate planning tools and strategies. Trusts, for example, are commonly found throughout the average estate plan. Trusts have evolved to the point where there are a variety of highly specialized trusts that serve very specific purposes. One such trust is an irrevocable life insurance trust, or ILIT. The Los Angeles estate planning attorneys at Schomer Law Group, APC explain how an Irrevocable Life Insurance Trust works and discuss why you might want to include one in your estate plan.
The Need for Funeral Planning
Thinking of your death and funeral in terms of the cost may be difficult to do; however, the reality is that dying is expensive. Moreover, by addressing the issue ahead of time you can prepare your estate and your loved ones for the eventuality of your death and the associated expenses. Experts tell us that, on average, you can expect to pay around $10,000 for a relatively modest funeral and burial service. Of course, purchasing a high-end casket, planning a larger service, or adding in a more elaborate tombstone will increase the overall cost. While there are several ways you can pre-fund your funeral and burial, a specialized trust known as an Irrevocable Life Insurance Trust (ILIT) is a common choice.
How Does a Trust Work?
A trust is a fiduciary legal arrangement that allows a third party, referred to as a Trustee, to hold assets on behalf of a beneficiary or beneficiaries. Trusts all fall into one of two categories – testamentary or living trusts. A testamentary trust is activated by a provision in the Settlor’s Will at the time of death whereas a living trust activates once all formalities of creation are in place and the trust is funded. Living trusts can be further divided into revocable and irrevocable living trusts.
What Is an Irrevocable Life Insurance Trust?
An Irrevocable Life Insurance Trust is a highly specialized trust that provides tax advantages along with the general benefits you get from a trust. Life insurance proceeds usually pass to the named beneficiary free of any income tax; however, the payout from a life insurance policy is generally included in the “gross estate” of the policy owner for estate tax purposes at the policy owner’s death and is potentially subject to federal and state estate taxes. At a tax rate of 40 percent, gift and estate taxes should be avoided whenever possible. An ILIT takes advantage of a loophole created by Congress. If an ILIT is created to own the life insurance policy and the proceeds of the life insurance policy are payable to the trustee of the ILIT upon the insured’s death, then the proceeds are not included in the insured’s estate and, therefore, are not taxable for federal estate tax purposes. This applies even though the insured gives the money to the Trustee of the ILIT to pay the annual premiums of the life insurance policy.
Along with using an ILIT to provide the funding for your funeral and burial, however, you can also use the trust terms to ensure that your burial and funeral are carried out according to your wishes. For instance, you can use the terms to specify where you want to be buried or make it clear that you wish to be cremated. You can be extremely detailed with your trust terms, providing a list of music, dictating the guest list, and choosing the flowers, or you can keep them general and flexible. Your Trustee will be legally obligated to abide by those terms once the trust is activated. This all but eliminates the possibility of conflict over the details of your funeral and burial.
Contact Los Angeles Estate Planning Attorneys
For more information, please join us for an upcoming FREE seminar. If you have additional questions or concerns about including an ILIT in your estate plan, contact the experienced Los Angeles estate planning attorneys at Schomer Law Group APCby calling (310) 337-7696 to schedule an appointment.
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