Although every estate plan is as unique as the person who creates the plan, there are some estate planning tools and strategies that are commonly found in an estate plan. A trust is at the top of that list. Although once used almost exclusively by very wealthy families as a way to pass down the family fortune without paying taxes on the transfer, both the law and trusts have evolved over time to the point where the average person can benefit from including a trust in his/her estate plan. One specific type of trust, a life insurance trust, can be particularly advantageous to include in your estate plan. The Lincolnshire estate planning lawyers at Hedeker Law, Ltd. explain how a life insurance trust can help you and your estate planning goals.
What Is a Trust?
At its most basic, a trust is a relationship whereby property is held by one party for the benefit of another. All trusts start out the same because all trust require the same basic elements for creation, including:
- Settlor – the person who creates the trust. Also referred to as a “Grantor,” “Maker,” or “Trustor.”
- Trustee – the individual or organization responsible for administering the trust and managing trust property.
- Beneficiary – the person, organization, or even family pet that benefits from the trust. A trust may have an unlimited number of beneficiaries and may also have current and future beneficiaries.
- Terms – created by the Settlor, the terms guide the operation of the trust and may include anything the Settlor wishes as long as it is not illegal or unconscionable.
- Funding – almost any type of assets may be used to fund a trust, including cash, securities, real property, or the proceeds of a life insurance policy.
Trusts all fall into one of two categories – testamentary and living trusts. A testamentary trust which does not activate until a provision in the Settlor’s Will causes it to activate upon the death of the Settlor. A living trust, as the name implies, is a trust that activates while the Settlor is alive and as soon as all formalities of creation are in place. Living trusts can also be divided yet again into two categories – revocable and irrevocable living trusts.
Trust Assets and the Benefits of an Irrevocable Living Trust
Assets held by a trust bypass the probate of your estate, meaning they can be distributed to the intended beneficiaries immediately following your death. This alone can be sufficient reason to include a trust in your estate plan because probate assets can be tied up for months, even years, before they become available for the beneficiary’s use.
In addition, however, assets held in an irrevocable living trust become trust property, meaning they are outside the reach of creditors while you are alive and they do not count as part of your taxable estate for federal gift and estate tax purposes after your death. Consequently, you could have a $5 million insurance policy that is not included in your taxable estate if you transfer the policy into an irrevocable life insurance trust. The trust can even purchase additional insurance after the trust is established. Having a trust own the policy is better than having a spouse or adult child as the owner because if that person predeceases you the policy becomes part of their estate.
Yet another benefit to a life insurance trust is the control it offers to the Settlor (you). The Trustee is required to follow the trust terms exactly as they are written. Since you created the terms, you know exactly how the proceeds of the life insurance policy will be distributed and even used if you so choose. For example, many people use a life insurance trust for funeral and burial planning purposes, relying on the trust terms to ensure that their wishes will be honored with regard to the handling of their body after death and the type of funeral service that is held in their honor.
Contact Lincolnshire Estate Planning Lawyers
Please plan to join us for one of our FREE estate planning seminars. If you have questions or concerns regarding a life insurance trust in the State of Illinois, contact the experienced estate planning attorneys at Hedeker Law, Ltd. by calling (847) 913-5415 to schedule an appointment.
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