Frequently Asked Questions Concerning Estate Planning Issues

Q: What are estate taxes?
A:
Estate taxes are federal taxes which must be paid within nine months after you die. As of 2014, federal estate taxes must be paid on all funds over $5,340,000 in your estate. The estate tax rate is 35% for funds over the $5,340,000 amount. In addition, New York State has an estate inheritance tax which has a tax rate of approximately 16% on proceeds received over $1,000,000.

Q: What is a life insurance trust?
A:
An irrevocable life insurance trust is a device that allows life insurance to pass upon your death, not subject to estate taxation by either the state government or the federal government. Life insurance proceeds are already exempt from income taxation.

Q: What are the components of a life insurance trust?
A:
There are three aspects to a life insurance trust. First the grantor, who is the person that creates the trust, is the person whose life the insurance policy is based on. The grantor selects a trustee who controls the trust after the grantor’s death. The grantor cannot be the trustee of the trust. The trust has beneficiaries who receive the proceeds of the trust. Usually in an irrevocable life insurance trust situation, the trust itself is the beneficiary.

The trust purchases the policy, names the individual making the payments on the policy as the insured, and the trust acts as both the owner and the beneficiary of the policy in most cases. When the insured dies, the insurance company pays the money into the trust. The trustee uses the trust to pay estate taxes or other expenses regarding the estate such as probate expenses, legal fees, debts, income taxes that may be owed related IRAs and/or other retirement benefits. The trustee can thereafter distribute the proceeds of the trust to the beneficiaries or the trustee can hold the trust funds and utilize them for the beneficiaries benefits over longer periods of time.

Q: Why can’t a person whose life the insurance policy is based on be the trustee?
A:
The Internal Revenue Service will not allow the person whose life the insurance policy is based on to either be the trustee or the beneficiary of the trust. It is required that the person whose life the insurance policies are based on have no ownership interest or control of the trust in order for these proceeds to escape estate tax taxation.

Q: Why not name a spouse or child as the beneficiary or owner of the trust?
A:
There are several reasons for avoiding this. First, the owner of the trust can redeem the cash value of the life insurance. Secondly, the owner of the trust could change the beneficiaries of the trust which would destroy the entire estate planning concept you had developed. If someone else owns the policy other than the trust itself, you have no control over what they will do to the policy. This would allow the owner of the policy to cancel the policy if they desired.

Q: Who really controls the life insurance trust?
A:
The reality is, you control the life insurance trust even though you are not named as the owner of the policy. Since you named the trustee, the trustee must follow the instructions laid out by you in the life insurance trust. Since the trust itself is the beneficiary of the life insurance policy, you have control of the proceeds pursuant to the instructions you lay out for the trustee.
There are a number of things the trustee can do with the proceeds of the trust after your death. He or she can pay estate taxes on your estate. The trustee can provide funds for your spouse to live on. The funds for your spouse can be paid out over a lifetime as income. The trustee can pay portions of the trust to your children over a period of time.

Q: Are there other restrictions concerning the transfer of existing life insurance policies to the irrevocable life insurance trust?
A:
Yes! There is a three year look back period. This means if a transfer from an existing life insurance policy is made within three years of the time of your death, the transfer will be considered invalid by the Internal Revenue Service and the trust will not be able to avoid estate taxation.

Q: When is the best time to set up the irrevocable life insurance trust?
A:
This is not a simple question. It could be set up at virtually any time. However, as an individual gets older, example in their 50s and 60s, the cost of the life insurance becomes prohibitively expensive. It is strongly suggested the irrevocable life insurance trust be set up as early in an individual’s lifetime as is possible. Another issue that occurs as individuals get older, is they may develop illnesses that make them uninsurable or make the cost of the insurance too expensive to be practical.

Q: Who should I deal with concerning setting up the life insurance trust?
A:
It is important that you utilize the services of an experienced estate planning lawyer to set up the life insurance trust or ILIT.

Q: What are the specific benefits of a life insurance trust?
A:

  • A. It provides liquidity or cash to pay estate taxes and other expenses at the time of death.
  • B. This is an inexpensive way to provide liquidity in the estate to pay estate and inheritance taxes.
  • C. It eliminates the life insurance proceeds from being part of the estate.
  • D. The life insurance proceeds are not part of the probate estate and therefore pass outside the probate process.
  • E. These trusts give you control over the proceeds from the life insurance.

Q: Estate planning, what is it?
A:
Estate planning is the development of a scheme to effectively carry out your specific wishes in the event of your death. Estate planning can involve the drafting of a will. In some situations, a will may help you minimize estate taxes. Estate planning can involve dealing with issues concerning your home, your business, your life insurance, your investments, your 401(k) plan, your pension, annuities and other assets. It deals with how these assets will be maintained and/or distributed in the event of your death or disability. Estate planning also involves dealing with who makes decisions concerning health care issues in the event you are incapacitated and unable to make those decisions on your own. In addition, estate planning deals with the issues of who will raise your children and be their guardians in the event of the death of you and your spouse. Estate planning also deals with who will have power of attorney to help you handle financial affairs, should you be unable to handle those affairs on your own.

Q: When is the appropriate time to do an estate plan?
A:
Estate plans can only be devised when you are alive and have the mental capacity to deal with these issues. Many people put off developing an estate plan until they perceive they are very old. You can never tell when you are going to suffer a disability. Accidents can happen at any time. If you wait until you are very old and ill, your estate plan could be subject to being attacked for lack of mental capacity, fraud, duress, conversion, or undue influence. It is best to do an estate plan when you are healthy and fully cognizant of your assets, what you want for your children, and what is in your best interest and the best interest of your family members.

Q: Estate planning, what is it?
A:
Estate planning is the development of a scheme to effectively carry out your specific wishes in the event of your death. Estate planning can involve the drafting of a will. In some situations, a will may help you minimize estate taxes. Estate planning can involve dealing with issues concerning your home, your business, your life insurance, your investments, your 401(k) plan, your pension, annuities and other assets. It deals with how these assets will be maintained and/or distributed in the event of your death or disability. Estate planning also involves dealing with who makes decisions concerning health care issues in the event you are incapacitated and unable to make those decisions on your own. In addition, estate planning deals with the issues of who will raise your children and be their guardians in the event of the death of you and your spouse. Estate planning also deals with who will have power of attorney to help you handle financial affairs, should you be unable to handle those affairs on your own.

Q: When is the appropriate time to do an estate plan?
A:
Estate plans can only be devised when you are alive and have the mental capacity to deal with these issues. Many people put off developing an estate plan until they perceive they are very old. You can never tell when you are going to suffer a disability. Accidents can happen at any time. If you wait until you are very old and ill, your estate plan could be subject to being attacked for lack of mental capacity, fraud, duress, conversion, or undue influence. It is best to do an estate plan when you are healthy and fully cognizant of your assets, what you want for your children, and what is in your best interest and the best interest of your family members.

Q: What reasons are there for having an estate plan?
A:
An individual should have an estate plan if he or she:

  • is concerned about who will receive property and pay debts after death.
  • has minor children.
  • is helping support an elderly or sick family member or relative.
  • is concerned about what will become of you and how you will be treated should you become disabled.
  • has substantial assets and does not wish them to be depleted by State and Federal taxes.
  • wants to make sure you can provide for your family after your death.
  • wants to make sure the person you want to raise your children, raises them after you die.
  • If any of the foregoing items are important to you, hire an attorney and have him do an estate plan for you.

Q: Will an estate plan avoid the necessity for a guardianship proceeding should I become mentally or physically disabled and unable to handle my affairs?
A:
In the event you are unable to handle your financial affairs, an appropriate estate plan will avoid the necessity of a guardianship proceeding. Your estate plan should involve you drafting a will, a healthcare proxy, a living will, and an estate planning power of attorney. In certain circumstances, it may also involve drafting a testamentary or living trust. The best way to determine which of these items you will need is to have a consultation with a qualified estate planning lawyer.

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