The irrevocable life insurance trust is not the only form of trust that’s useful with an estate plan. There are actually several different types of trusts that have important roles to play in the estate planning process.
One of the more popular trusts is the so-called “living trust,” more technically known as an inter vivos trust.
A living trust is a legal document that resembles a will. Like a will, a living trust stipulates how an individual’s assets are to be distributed, and the specific terms of those distribution plans. Unlike a will, however, a living trust operates during the lifetime of the person who set it up.
The intent of a living trust is to manage assets during periods of disability and at death. A common purpose for living trusts is to protect assets should the grantor become mentally or physically incapacitated. That is, it contains detailed instructions for the management of assets should the grantor become disabled, as well as directions for the distribution of assets at death.
Because they stipulate the disposition of assets at death, a living trust must dovetail with the terms of the grantor’s will.
So, let’s sum up the advantages of an irrevocable life insurance trust and see why most feel it is such an important part of any estate plan. . .
An irrevocable life insurance trust can be used by taxpayers who wish to remove not only substantial assets from their gross estates, but also any income from or future appreciation of those assets. This tax benefit is paid for by giving up complete control over the trust and trust assets.
By avoiding the insured’s estate, however, insurance proceeds in an irrevocable trust do not increase the decedent’s estate tax burden. Thus, they can be a source of income for the surviving family, while providing funds to pay estate taxes for the estate, but not from the estate. This can help avoid a forced sale of assets at the grantor’s death. There are some issues that anyone considering an irrevocable life insurance trust will have to evaluate relative to their circumstances. Questions to consider are will there be sufficient cash flow to cover the premiums? Are there enough liquid assets so that the funds contributed to the trust will not be needed for future living costs? You also want to understand the administration issues and costs involved with an irrevocable life insurance trust.
Be sure to get qualified professional help when establishing this or any type of trust.
Seek a lawyer, research and find the best fit for your estate.