ILIT Trusts – Do I give the Policy Proceeds Outright, or in Trust?

 

So doesn’t a life insurance policy usually just pay a lump sum to the beneficiary?  The answer is yes unless the beneficiary is a minor.  If that is the case, the UTMA (Uniform Transfer to Minors Act) or a guardian will need to be appointed which costs time and money.  The guardian will have to control the assets and administer the proceeds until the minor reaches the age of majority.  A lump sum can also be thought of as an outright gift because there is no control or restrictions.

 

Outright, or in Trust?

Outright gifts can present a variety of problems such as:

  • If the beneficiary receives means tested public benefits such as Medicaid or SSI (Supplemental Security Income), the outright gift may put the receiving of these benefits in jeopardy.
  • If the beneficiary of an outright gift is a minor, a guardian will have to be appointed (if one is not already in place) by a court which takes time and costs money.
  • An outright gift can be dangerous if the beneficiary has a substance abuse problem.
  • A lump sum gift may not be the best to protect the beneficiary from a bad marriage, creditors, or predators.
  • Even one that is good with money may experience problems if given a large sum of money all at once.

 

For these reasons alone a gift given in a Trust is preferable.  A Trust (a Revocable Trust or an Irrevocable Trust) can control or guide the proceeds and provide very little control, to a high level of control. 

 

An ILIT (Irrevocable Life Insurance Trust) can be structured just like a Revocable Living Trust in how the proceeds are to be given to the beneficiaries.  The Trust can provide no guidance or control, or the Trust can provide a lot of guidance and control over the distribution of the proceeds. 

 

Please see my Blog for continued discussion of various aspects of ILIT Trusts.

 

See lots of estate planning information on my website at: www.myestate-plan.com

 

Please feel free to give me a call and we can establish your Living Revocable Trust, ILIT, or other Estate Planning goals today.  If you have specific estate planning objectives, I can help create solutions to achieve your specific purpose. 

 

Thanks for reading my blog.

 

 

William Daniel Powell

619-980-2297

This email address is being protected from spambots. You need JavaScript enabled to view it.

 

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This document is for informational purposes only.  Nothing in this is to be considered legal advice.  Nothing in this shall create an attorney/client relationship, nor shall it create a confidential relationship.  If you need legal advice (in California), feel free to contact me or someone licensed to practice in your jurisdiction.  I assume no liability or responsibility for actions taken, or not taken, as a result of reading this information

Also, please remember that I speak in generalities in my blog and my website. There are so many different factors that can contribute and completely change the outcome that it would be impractical to discuss all of them here.

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Saturday, 21 May 2016 01:02

Standalone Retirement Trust Part 1

Written by

Standalone Retirement Trust – Estate Planning for IRA’s

 

Clark vs Rameker

Clark versus Rameker was a case that was heard by the United States Supreme Court and it was a 9 to 0 decision.  The decision was handed down in June of 2014.  The Supreme Court held that inherited IRAs are not “retirement funds” within the meaning of federal bankruptcy law.  The effect of this decision is that inherited IRAs are available to satisfy creditors’ claims if the person inheriting them declares bankruptcy. 

 

Because of this decision, and if you’d like to protect your beneficiary’s inheritance, for the purposes of Estate Planning, we need to take some steps to make sure your beneficiary is protected.

 

In order to protect your beneficiary, a Standalone Retirement Trust (or SRT) should be created instead of just naming a beneficiary on your IRA.  Otherwise, if your beneficiaries have creditors, lawsuit judgments against them, or other predators, the IRA funds can be reached.  Naming a beneficiary on your IRA instead of using a Standalone Retirement Trust means the IRA funds will be given “outright” and gifts given outright are more exposed and generally not as preferred as giving a gift in Trust.  A Trust provides more protection than a gift given outright will ever provide.  Please see my Blog for more on gifts given outright versus gifts given in trust

 

Essentially what happens is that the funds will go to a third party Trust and because the Beneficiary did not create the Trust, did not use his or her own money for the Trust, and cannot modify the Trust, certain protections can be utilized to protect the beneficiary.  The trust must be carefully drafted in order to properly manage the funds and prevent mandatory payouts that will require emptying the IRA in as little as five years.  The Trust must be drafted in such a way as to ensure that the Trust itself qualifies as a “Designated Beneficiary.” The effect of having the Trust as the designated beneficiary means that the Trust will be able to take out what is called “minimum required distributions” (these are minimum dollar amounts that, according to the rules, must be payed out of the IRA) according to the beneficiary’s life expectancy, and not the plan participant’s life expectancy.

 

Please see my Blog for more discussion of Standalone Retirement Trusts and other aspects of Estate Planning.

 

Please feel free to give me a call and we can establish your Revocable Living Trust, Standalone Retirement Trust, Irrevocable Life Insurance Trust (ILIT), or other Estate Planning goals today.  If you have specific estate planning objectives, I can help create solutions. 

 

See lots of estate planning information on my website at: www.myestate-plan.com

 

Thanks for reading.

 

William Daniel Powell

619-980-2297

This email address is being protected from spambots. You need JavaScript enabled to view it.

 

 

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This document is for informational purposes only.  Nothing in this is to be considered legal advice.  Nothing in this shall create an attorney/client relationship, nor shall it create a confidential relationship.  If you need legal advice (in California), feel free to contact me or someone licensed to practice in your jurisdiction.  I assume no liability or responsibility for actions taken, or not taken, as a result of reading this information

Also, please remember that I speak in generalities in my blog and my website. There are so many different factors that can contribute and completely change the outcome that it would be impractical to discuss all of them here.

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ILIT Trusts – Who should be the Trustee and Beneficiary?

Likely the most important thing to know is that the insured should not act as the Trustee in order to preserve the Irrevocable Life Insurance Trusts benefits.  If the insured’s spouse is also an insured and not the beneficiary, he or she could serve, or even perhaps an adult child, however whomever is chosen must have the time and sophistication to manage the ILIT Trusts responsibilities.  When policy premiums are due, the Trustee must send out Crummey Letters (from the case of the same name), wait the required amount of time, then pay the policy premium.  The Trustee also must file tax returns manage the ILIT’s bank account if necessary.

 

 

Who can be the Beneficiary of my ILIT?

 

Basically anyone you choose can be the beneficiary of your Irrevocable Trust.  Of course most people normally select their children or other loved ones. 

  

Can’t I just Name Someone else as the Policy Owner Instead of Creating an ILIT?

 Well, the problem with this method is similar to the problems that are created if you put your child’s name on the deed to your house to avoid estate planning.  One problem is that if your child passes away before you do, the value of the policy will be included in the child’s estate for federal estate tax purposes which may be a problem.  Also, you will lose control over the policy and the child can cash the policy out, cancel it, or even change the beneficiary to another without even having to ask you.  Creditors may even have access to the policy should the child get into trouble. 

 

 

Please see my Blog for continued discussion of various aspects of ILIT Trusts.

 

See lots of estate planning information on my website at: www.myestate-plan.com 

 

Please feel free to give me a call and we can establish your Revocable Living Trust, your Irrevocable Life Insurance Trust (ILIT), or other Estate Planning goals today.  If you have specific estate planning objectives, I can help create solutions. 

 

Thanks for reading my blog.

 

William Daniel Powell

619-980-2297

This email address is being protected from spambots. You need JavaScript enabled to view it.

 

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This document is for informational purposes only.  Nothing in this is to be considered legal advice.  Nothing in this shall create an attorney/client relationship, nor shall it create a confidential relationship.  If you need legal advice (in California), feel free to contact me or someone licensed to practice in your jurisdiction.  I assume no liability or responsibility for actions taken, or not taken, as a result of reading this information

Also, please remember that I speak in generalities in my blog and my website. There are so many different factors that can contribute and completely change the outcome that it would be impractical to discuss all of them here.

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ILIT Trusts – Keeping the Proceeds out of the Insured Estate for Federal Estate Tax Purposes

 

 

Do Life Insurance Proceeds get Included in my Estate for Death Taxes?

 

What are Death Taxes?  For the purpose of federal tax, the is something called federal estate tax exclusion and it is adjusted, or indexed, for inflation.  In 2016 the federal estate tax exclusion is $5.45 million dollars for an individual, and $10.9 million dollars for a couple.  That means that an individual dying in 2016 with an estate valued at less than $5,450,000 dollars will not owe any federal estate tax.

 

So how do we determine what is includable in the decedents estate for federal estate tax?  Let’s leave that for another discussion.  Suffice it to say that generally life insurance IS includible in the insured’s estate for death tax purposes.  Even an Irrevocable Life Insurance Trust (ILIT) may be included in the insured’s estate.  An ILIT is used expressly TO keep the proceeds out of the insured’s estate, so what gives?  Well, if the Irrevocable Trust is poorly drafted or managed, the proceeds may be included.  Also, if the insured gratuitously transfers all the rights in the policy within three years of his or her death, the Internal Revenue Service code section 2035(a) makes the proceeds includible in the decedent’s estate for federal estate tax purposes.   The reason is the way the IRS sees it is that the gift was made “in contemplation of death”, and therefore is disallowed. 

 

 

Does an ILIT’s proceeds get included in my Estate for Death Taxes?

 

The purpose of an Irrevocable Life Insurance Trust is to keep the proceeds out of the insured’s estate for federal estate tax.  This is achievable if the above criterion is met (policy not transferred within three years of the insured death), and certain other criteria is also met.  One of these is that the insured must not require that the beneficiary use the proceeds to pay obligations of the estate such as taxes.  Another is that the insured must not possess “incidents of ownership”.

 

 

What are Incidents of Ownership?

 

Incidents of ownership means the power of the insured or his or her estate to control the proceeds of the policy, the power to change beneficiaries, to assign the policy, to borrow or loan from the policy, and others. 

 

So, as you can see there are many restrictions and requirements in how the Trust is drafted, and how it is maintained in order for this ILIT Irrevocable Trust to function as intended.   Consult an attorney like me for your Estate Planning needs to help insure a proper outcome. 

 

 

Please see my Blog for continued discussion of various aspects of ILIT Trusts.

 

 

Please feel free to give me a call and we can establish your Living Revocable Trust, ILIT, or other Estate Planning goals today.  If you have specific estate planning objectives, I can help create solutions to achieve your specific purpose. 

 

See lots of estate planning information on my website at: www.myestate-plan.com 

 

Thanks for reading my blog.

William Daniel Powell

619-980-2297

This email address is being protected from spambots. You need JavaScript enabled to view it.

****************

This document is for informational purposes only.  Nothing in this is to be considered legal advice.  Nothing in this shall create an attorney/client relationship, nor shall it create a confidential relationship.  If you need legal advice (in California), feel free to contact me or someone licensed to practice in your jurisdiction.  I assume no liability or responsibility for actions taken, or not taken, as a result of reading this information

Also, please remember that I speak in generalities in my blog and my website. There are so many different factors that can contribute and completely change the outcome that it would be impractical to discuss all of them here.

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Advanced Estate Planning – An Overview of ILIT Trusts – Part Two

  

How does an ILIT (Irrevocable Life Insurance Trust) work?

 

First things first – we need to create an Irrevocable Life Insurance Trust.  Even though after all the steps are performed, and you cannot change the Trust, the good news is that you have a good amount of control in creating the Trust at the beginning.  You can pick who will serve as the Trustee (the Trust manager), and decide how much control you will build into the Irrevocable Trust in managing the distribution of the benefits.  The next step is to acquire a life insurance policy for the Trust to hold with the Trustor (the Trust creator, you) as the insured and the Trust as the owner.  The insurance premiums will be paid by the Irrevocable Trust in a special way.  You will make transfers to the Trust and utilize your annual gift tax exclusion further reducing your potential federal estate tax exposure (please see my blog here for a discussion of Federal Estate Tax: how much is federal estate tax ).  The Trustee of the Irrevocable Trust will tell the beneficiaries that they can withdraw the money if they so choose via something called Crummey Letters.  The beneficiaries would rather keep the insurance policy in place and choose not to withdraw the money.  The Trustee then pays the policy premium.

 

There are many restrictions and requirements in how the Trust is drafted, and how it is maintained in order for this Irrevocable Trust to function as intended.   Please see my Blog for continued discussion of various aspects of ILIT Trusts.

 

Please feel free to give me a call and we can establish your Living Revocable Trust, ILIT, or other Estate Planning goals today.  If you have specific estate planning objectives, I can help create solutions to achieve your specific purpose. 

 

See lots of estate planning information on my website at: www.myestate-plan.com 

 

Thanks for reading my blog.

 

William Daniel Powell

619-980-2297

This email address is being protected from spambots. You need JavaScript enabled to view it.

****************

This document is for informational purposes only.  Nothing in this is to be considered legal advice.  Nothing in this shall create an attorney/client relationship, nor shall it create a confidential relationship.  If you need legal advice (in California), feel free to contact me or someone licensed to practice in your jurisdiction.  I assume no liability or responsibility for actions taken, or not taken, as a result of reading this information

Also, please remember that I speak in generalities in my blog and my website. There are so many different factors that can contribute and completely change the outcome that it would be impractical to discuss all of them here.

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Advanced Estate Planning – An Overview to ILIT Trusts

 

What is a Trust?

As discussed in my other Blog posts, a Trust is a means of passing property to other persons.  A Trust is an advantageous method of passing property for several reasons.  With a Trust, you can help yourself in planning for your potential incapacity.  Also, with a Trust, you can better control how your beneficiaries receive what you leave them and can help protect those you choose as beneficiaries from bad marriages, predators, and the like.  Trusts don’t need to go through Probate and therefore save time and money.  A Trust – be it a Revocable Living Trust, or Irrevocable Trust – is a private document where a Will becomes public record when Probate is opened. 

 

 

What is an ILIT?

 

ILIT stands for Irrevocable Life Insurance Trust.  An Irrevocable Trust is just that – Irrevocable and thus not able to be changed like a Living Revocable Trust can be.  Sounds kind of scary and final doesn’t it?  Well, there are great reasons to use an Irrevocable Trust.  One reason to use an Irrevocable Trust is to create a Special Needs Trust to protect means tested public benefits like Supplemental Security Income (or SSI), or Medicaid and others.  Another great use of an Irrevocable Trust is to create an ILIT or Irrevocable Life Insurance Trust – the subject of this blog. 

 

An ILIT is typically used as an advanced estate planning technique.  When a person wishes to leave money to a person, but is either over the federal estate tax exemption amount (in 2016 it is $5.45 million for an individual, and $10.9 million for a couple), or close to reaching the federal estate tax exemption amount, the use of an ILIT is a great option.  The reason it is a great option is because properly structured, an Irrevocable Life Insurance Trust means that the proceeds of the life insurance are not includable in the insured’s estate for federal estate tax purposes.  Therefore, tax savings are realized.

 

 

How does an ILIT (Irrevocable Life Insurance Trust) work?

 

For the rest of the explanation of ILIT Trusts and how they work, please see Part 2 of this Blog.  Thank you.

 

See lots of estate planning information on my website at: www.myestate-plan.com 

Please feel free to give me a call and we can establish your Living Revocable Trust, ILIT, or other Estate Planning goals today.  If you have specific estate planning objectives, I can help create solutions to achieve your specific purpose. 

 

Thanks for reading my blog.

 

William Daniel Powell

619-980-2297

This email address is being protected from spambots. You need JavaScript enabled to view it.

****************

This document is for informational purposes only.  Nothing in this is to be considered legal advice.  Nothing in this shall create an attorney/client relationship, nor shall it create a confidential relationship.  If you need legal advice (in California), feel free to contact me or someone licensed to practice in your jurisdiction.  I assume no liability or responsibility for actions taken, or not taken, as a result of reading this information

Also, please remember that I speak in generalities in my blog and my website. There are so many different factors that can contribute and completely change the outcome that it would be impractical to discuss all of them here.

****************

Using Life Insurance in Estate Planning for small estates or young couples.

 

Many young people and young couples don’t think much about estate planning because in our early life, we don’t have much property or funds with which to plan!  For those young couples or individuals with children, money is probably even more thin.  These young people and young couples likely need estate planning more than they know.  What happens to your kids or spouse should something happen to you?  Admittedly, it is not fun to think about, but why leave the burden to your loved ones?  So many couples now have both spouses working and removing one of the streams of income can be devastating.  I know I wouldn’t want an unexpected fifty percent reduction in my income – no matter what point I was at in my life.  Not only is an income stream now gone, but there will likely be other short-term expenses such as medical, funeral, living expenses, and other bills. 

 

 

Life Insurance and Estate Planning to the Rescue!

 

Life insurance is a brilliant Estate Planning tool.  For the young person or young couple (or anybody really), life insurance can be utilized to provide funds where none may otherwise exist. 

 

Life insurance can create an estate that was not otherwise present.    

 

Life insurance can “fund” a Living Trust for the benefit of your family and used to help take care of a variety of things including:

  • The creation of the estate itself
  • Payment of taxes
  • Replacement of an income
  • Paying medical and funeral costs
  • Pay for college
  • Or just about anything else that money is used for

 

While you can designate a beneficiary of the life insurance policy without creating an Estate Plan, there are other considerations.  Having the Trust as the beneficiary of the policy proceeds provides all of the normal protections that a Revocable Living Trust provides.  Utilizing a Living Trust (or potentially an Irrevocable Trust) is better than naming a beneficiary for several reasons.  What happens of you and your spouse die simultaneously?  What if your kids are minors?  Without a proper Estate Plan, court proceedings will need to be instigated where there are minor children that are to receive property.  A Living Trust can help protect your beneficiaries from losing half their inheritance due to a bad marriage, or other predators.

 

Please feel free to give me a call and we can establish your Living Revocable Trust or other estate planning objectives today.  If you have specific estate planning goals, I can help create solutions you may not be aware of. 

 

See lots of estate planning information on my website at: www.myestate-plan.com

 

Thanks for reading my blog.

 

William Daniel Powell

619-980-2297

This email address is being protected from spambots. You need JavaScript enabled to view it.

 

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This document is for informational purposes only.  Nothing in this is to be considered legal advice.  Nothing in this shall create an attorney/client relationship, nor shall it create a confidential relationship.  If you need legal advice (in California), feel free to contact me or someone licensed to practice in your jurisdiction.  I assume no liability or responsibility for actions taken, or not taken, as a result of reading this information

Also, please remember that I speak in generalities in my blog and my website. There are so many different factors that can contribute and completely change the outcome that it would be impractical to discuss all of them here.

****************

Friday, 06 May 2016 04:09

What is an A/B Trust Used For?

Written by

What is an A/B Trust? 

 

First, let me explain the “usual” situation.  A married couple creates a Joint Revocable Living Trust.  Think of this Revocable Living Trust as a single bucket.  This Trust, or bucket, holds whatever property the couple decides to put into it.  Usually, the couple gives everything to the surviving spouse, and the surviving spouse can use all of the assets and decide who is to receive the remaining assets or even revoke the Trust.  It is a Revocable Living Trust after all. 

 

Now let us consider the following scenario: a person remarries with children from the previous marriage.  The new spouse may or may not have children of their own.  How does such a “blended family” plan their estate so that children from previous marriages don’t get cut out?  An A-B Trust may be a good solution to such a thing. 

 

So let’s think of an A/B Trust as a bucket with a dotted line down the middle.  Each spouse puts property into the bucket (the A/B Trust), and is free to do with it what they like while both spouses are alive.  Upon the first spouse to die, their half of the bucket – the B Trust – solidifies and cannot be changed by the surviving spouse.  The A Trust, or the survivors Trust, remains in the control of the surviving spouse.  Usually the surviving spouse can continue to live in the family residence, and have access to other assets provided the Trust is drafted in such a manner.

 

If I have children from a Prior Marriage, Should I use an A/B Trust if I Remarry?

 

The answer to this question is that an A/B Trust is a good tool to use in “blended family” situations, but it is only one option.  The facts of your particular situation will guide how the Estate Plan should be drafted. 

 

Please feel free to give me a call and we can establish your Living Revocable Trust or other estate planning objectives today.  If you have specific estate planning goals, I can help create solutions you may not be aware of. 

 

See lots of estate planning information on my website at: www.myestate-plan.com

 

Thanks for reading my blog.

 

William Daniel Powell

619-980-2297

This email address is being protected from spambots. You need JavaScript enabled to view it.

 

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This document is for informational purposes only.  Nothing in this is to be considered legal advice.  Nothing in this shall create an attorney/client relationship, nor shall it create a confidential relationship.  If you need legal advice (in California), feel free to contact me or someone licensed to practice in your jurisdiction.  I assume no liability or responsibility for actions taken, or not taken, as a result of reading this information

Also, please remember that I speak in generalities in my blog and my website. There are so many different factors that can contribute and completely change the outcome that it would be impractical to discuss all of them here.

****************

Wednesday, 04 May 2016 23:35

Advanced Estate Planning Overview

Written by

Advanced Estate Planning – An Overview

 

What Do You Think of When I Say Advanced Estate Planning?

 

Some people think advanced estate planning is just for the rich or wealthy.  Well, it’s not quite that easy.  Certainly there are advanced wealth transfer techniques that are available to high net-worth persons.  One of the easiest estate plan situations is a single person, never married, one or two beneficiaries, and a relatively small estate (under the federal estate tax exemption).  Things tend to get a bit more advanced as situations and goals get more complicated.  Planning can get a bit more complicated when a people with children from prior relationships marry and create the so-called “blended family”.  Often in these circumstances, each partner wants to make sure that their kids don’t get cut out of the estate should they be the first to pass away.  Another way things can get complicated is with an intricate and detailed distribution structure.

 

 

Life Insurance for Advanced Estate Planning

 

A wonderful technique for estate planning is the use of life insurance.  On one extreme, life insurance can be used in high net-worth estates to pay estate taxes.  On the other side, life insurance can be used to create the estate itself.  For a young parent or young family, life insurance may be the best way to make sure the kids or family is taken care of in the event that the primary money earner passes away or becomes incapacitated.  In most families today, both spouses work and may be equal money earners.  Even in this situation, the use of life insurance is advisable because maintaining the lifestyle on only one salary can be difficult or impossible.  Aside from lifestyle, there are other expenses life insurance can provide for such as college expenses, weddings, and the like.

 

Advanced techniques will be discussed here in my blog.  These techniques include:

  • The use of life insurance in Estate Planning
  • A/B Trust or Bypass Trust
  • Trusts for couples where one spouse is not a U.S. citizen
  • Using the Unlimited Marital Deduction
  • Using the Federal Estate Tax Exemption
  • Utilizing the yearly gift exclusion amount
  • Plus more

 

Please feel free to give me a call and we can establish your Living Revocable Trust or other estate planning objectives today.  If you have specific estate planning goals, I can help create solutions you may not be aware of. 

 

See lots of estate planning information on my website at: www.myestate-plan.com 

 

Thanks for reading my blog.

 

William Daniel Powell

619-980-2297

This email address is being protected from spambots. You need JavaScript enabled to view it.

 

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This document is for informational purposes only.  Nothing in this is to be considered legal advice.  Nothing in this shall create an attorney/client relationship, nor shall it create a confidential relationship.  If you need legal advice (in California), feel free to contact me or someone licensed to practice in your jurisdiction.  I assume no liability or responsibility for actions taken, or not taken, as a result of reading this information

Also, please remember that I speak in generalities in my blog and my website. There are so many different factors that can contribute and completely change the outcome that it would be impractical to discuss all of them here.

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