Why do I need a will or a trust? And if I have one, I don’t need the other, right? Not necessarily, states Beck & Lenox Estate Planning & Elder Law, Inc.
Say that some time ago– when your family was still young, and the estate tax limit was $600,000—you created a revocable and an irrevocable life insurance trust (ILIT). This was designed to take care of your family after your death. However, at this point, everyone is financially independent, and the value of your estate is far less than the taxable threshold of $11.7 million.
If the trust is terminated, the beneficiaries will get a step-up basis at your death and pay taxes at their own rates, rather than the trust rate. Would you need a will, if all the accounts have your children as beneficiaries? The ILIT was also funded with a term life insurance policy that is going to expire soon.
Nj.com’s recent article entitled “Should I terminate this trust and do I need a will?” says that there are number of issues to address. The purpose of an irrevocable life insurance trust (ILIT) is to own and control term or permanent life insurance policies, so that the policy proceeds aren’t included in the insured’s taxable estate upon his or her death.
While the current federal estate tax exemption amount is $11.7 million per person, the law is scheduled to expire at the end of 2025, when it will return to an exemption of $5 million, adjusted for inflation. It’s unknown if Congress will change the proposed exemption amount when the law sunsets.
If the ILIT is funded with a term policy that is set to expire soon, it may be easier to let the policy owned by the ILIT expire, which would render the ILIT immaterial. The terms of the ILIT will govern the procedure for the termination of the trust, which may be simple or onerous. Consult with an experienced estate planning attorney who can look more closely at the trust’s language.
A revocable living trust lets the person creating the trust control the assets in the trust and avoid probate. It also can be used to manage the trust assets by a successor trustee, in the event the grantor who created the trust becomes incapacitated.
New Jersey banks may freeze 50% of the assets in an estate at the owner’s death to be certain that any estate or inheritance taxes that may be due are paid. A tax waiver must be obtained to lift the freeze. The good news is, any assets in a trust aren’t subject to a similar freeze.
At the grantor’s death, a trustee must pay income tax, if the gross income of the trust is $600 or more. Depending on the amount of assets in the trust, the trust may not accumulate gross income of $600, if the assets are distributed outright to the beneficiaries right after the death of the grantor.
Lastly, it’s wise to have a will, even if the majority of assets are in a living trust or are in IRAs and other retirement accounts. That is because there may be some assets that are outside the trust or retirement account or there may be a need for a personal representative of the estate to handle tax or other types of refunds. Beck & Lenox’s common practice is to provide a “pour-over” will to take care of those assets outside the trust.
Here is a link to the Beck & Lenox website section on Wills and Trusts: https://beckelderlaw.com/estate-planning/wills-and-trusts/
If this particular topic and accompanying information was a bit much to absorb, go meet with an experienced estate planning attorney. Asking that simple question, Why do I need a will or a trust, can help you get your legal documents in order and feel that peace of mind knowing that you have protected your family as much as possible.
Reference: nj.com (June 15, 2021) “Should I terminate this trust and do I need a will?”