Estate planning is all about ensuring that your wishes are met both in life and after your death.  An estate plan has other vital goals such as ease of administration, tax minimization, and achieving harmony among family members.  Estate plans will include lifetime tools such as the powers of attorney and afterlife tools such as Last wills and Trusts.  However, in many cases, a trust has additional benefits as it combines what can be accomplished with the Last Will and powers of attorney (POA). A trustee has the lifetime and after-death ability to manage, buy, sell, and distribute any asset held under the trust.  This power extends in life and after but it is limited to trust assets.   A  POA  and Last Will can govern all assets in the individual’s name and can give the general ability to manage all legal and financial issues that arise in life or death.   

Life insurance is an asset that ideally can be well managed inside a trust. Life insurance is designed to be used after someone dies and is typically needed to cover the funeral and immediate expenses of the estate or to replace the unexpected loss of the income of the decedent. Since it will name beneficiaries the payment is immediate without the need for probate. Why would it be advantageous to place a life insurance policy into a trust or name a trust as the beneficiary of the policy?

How and why would you fund a Trust with a life insurance policy?  Let’s start with the basics:  a trust is a legal entity where one party, the trustee, holds the legal title of the assets owned by the trust, which is managed for the good of the beneficiary.  There can be more than one person who benefits from the trust (beneficiaries) and there can be a co-trustee, but we’ll keep this simple.

When a Trust is funded with a life insurance policy, the proceeds of the policy are payable directly to the trustee to be used as the trust instructs…  not just to an individual. This allows the funds to be used as the trust directs for administrative costs and special bequests and other specific purposes, such as a trust for a minor or disabled person.  This can provide the trustees instead of the beneficiary directly with assets that are needed after the death of the insured  This is especially important when the beneficiaries are minor children who are disabled, or if there are multiple beneficiaries.  Parents will purchase life insurance to provide support for their children if they should unexpectedly pass while the children are still young and dependent. Placing the insurance policy within a trust allows the funds to be used for the benefit of the minor or disabled heir when they cannot manage it and to provide control over how funds are used.

What kind of trust is best for your estate plan?  Trusts can be revocable or irrevocable.  There are pros and cons to both. Irrevocable trusts are used for asset protection and tax planning. If designed incorrectly, they may not remain as part of your estate.  However, with a $12.06 million federal exemption, most people don’t have to worry about federal estate taxes. Although it is to be noted that this exemption amount increases each year to keep up with the Cost of Living Increase. In 2025 this law will sunset and we do not know the outcome, If a new law is not passed the exemption amount will revert to the original amount of $5 million adjusted for inflation.  In an irrevocable trust, the grantor or creator cedes control over the assets in the trust to the trustee. If the grantor does not retain any interest in the trust assets,  not income or use of the trust assets then it will not be included in the grantor’s estate. Another benefit of giving up control of trust assets is that it is not attachable by the grantor’s creditors, such as a nursing home, or for extraordinary medical needs and long-term care costs.                                                   

A revocable trust has the main purpose to avoid probate and create the management of the assets in case of incapacity and simplify the estate by holding assets in one palace under one plan. The Grantor may serve as Trustee and maintain control over the funds in the trust.  The Grantor can continue to make changes to the trust funds rules,  eventual distributions of the assets in life or at the death of the Grantor, use of the trust assets and the investment strategy, etc.,  throughout the trust term.

As a result of these qualities, revocable trusts are the most commonly used trust in estate planning.  Here’s why:

  • Revocable trusts avoid probate, which can be a costly and lengthy process.  Assets left in the revocable trust pass directly to the heirs, far quicker than those left through the will. The Probate of a will in NY can take 6 – 8 months to complete, during that time there is no access to the decedent’s assets.
  • The trust creator can make changes to the trust as circumstances change. This flexibility and control make the revocable trust most attractive for effective estate planning.

If you are using life insurance to fund the trust, be sure the policy permits you to name ghee trust as the beneficiary, and be certain to name the subsequent beneficiaries in the trust document.  Missing this step is a common and critical mistake. Trust beneficiary designations must be crystal clear.  If two cousins have the same name, there will need to be a clear distinction made as to who is the beneficiary.  If someone changes their name that change must be reflected by the trust beneficiary designation.

Contact us today for guidance on these issues.  We are ready to help you and your family.

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