A trust is a separate legal entity that is set up to manage a person’s wealth and assets. Assets are placed inside a trust, a third party (trustee), manages the assets and determines how they are invested, and how, when, and to whom they are distributed.
Trusts are typically used by a person with wealth and assets to dictate how they are distributed. They also can be used to reduce tax burdens and avoid assets going to probate.
An irrevocable trust is a trust that cannot be changed without the consent of the beneficiaries. Whereas a revocable trust allows the owner of the trust to change the terms at any time without the consent of the beneficiaries.
There are some benefits and disadvantages to both products. With a revocable trust, the assets they place into it are not protected from creditors, also, when the insured dies, the assets are subject to both state and federal estate taxes. Additionally, if the trust includes assets other than life insurance, income taxes must be paid on the profits the trust earns. The main reason to choose an irrevocable trust is for tax purposes if the estate in question is large enough to be taxable by federal and state estate taxes. Irrevocable trusts remove the holdings from the insured’s taxable estate, making them no longer subject to estate tax upon death. Irrevocable and revocable trusts can be quite complicated and require the assistance of an estate planning attorney.
As of the writing of this article (May 2021), the current estate tax exemption is $11.7 million for an individual and $23.4 million for a couple, though the exemption is scheduled to revert to $5.5 million starting in 2026 and may potentially go even lower depending on whether the government changes these amounts in the future.
An irrevocable life insurance trust (ILIT) is created to own and control a life insurance policy or policies to manage and distribute the death benefit. If you are the owner and insured under a revocable trust, the death benefit will be included in your gross estate. Though, when life insurance is owned by an ILIT, the death benefit is not considered part of the insured’s gross estate and is not subject to state and federal estate taxation. If correctly set up, the ILIT can provide liquid assets to assist in paying estate taxes and expenses instead of paying the tax with other assets.
You can also gift assets throughout your lifetime up to a maximum of $15,000 per person per year, without eating into the lifetime exemption amount. For someone with four children, that means they could gift a total of $60,000 to the children each year to reduce the size of the estate without incurring any additional tax or eating into the exemption.
If you have any questions about the use of a revocable or irrevocable trust for life insurance, please call us at 1-888-972-0024. You can send us an e-mail by clicking here: E-mail Us
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