The costs that accrue when a person dies might surprise you. Funeral expenses, burial costs, and tax bills could be significant depending on a person’s assets and final wishes. An irrevocable life insurance trust provides you with a method of paying off those costs and potentially transferring additional resources to your heirs. Setting up these trusts is complex, and changing the terms after the creation of the trust is difficult. For these reasons, it is usually in your best interest to consult an experienced estate attorney when drafting a Wheaton irrevocable life insurance trust.
The ultimate goal of an irrevocable life insurance trust is to obtain the benefits of a life insurance policy while avoiding the impact it could have on an estate’s tax bill. With this type of estate planning device, a life insurance policy insuring the grantor’s life is owned by the trust instead of the grantor. This could have major tax implications for the grantor’s estate.
When a person passes away, they are subject to an estate tax under state law. Not every estate must pay this tax, however. An estate is only taxed on assets that exceed the lifetime exclusion limit. The limit is $4 million under state law and nearly $12 million under federal law. If an estate is worth less than these thresholds, they would not owe any estate taxes.
Unfortunately, the proceeds of a life insurance policy count towards the lifetime exclusion limit. In fact, the proceeds of these policies are often the single largest asset in the estate. In many cases, the inclusion of life insurance proceeds could make the difference between an estate owing taxes or not.
With an irrevocable life insurance trust, the proceeds of the insurance policy do not count towards the grantor’s lifetime exclusion limit. This makes the use of an irrevocable life insurance trust a valuable tool in the estate planning process.
In most cases, a person other than the grantor must serve as the trustee of a Wheaton irrevocable life insurance trust. Because the trust owns the policy instead of the grantor, the law prevents a grantor from serving as trustee in most cases.
Additionally, the grantor gives up the ability to control the policy from the moment the trust is created. That means they are able to make no changes to the beneficiaries, assign the policy to anyone else, or even cancel the policy. That does not mean the grantor is stuck with the policy forever. Typically, the grantor funds the trust throughout the term of the policy. This ensures the trust has enough money to meet the premiums. If the grantor stops making payments, the policy lapses.
The role of a trustee in these situations is fairly limited. It is their job to receive the payments from the policy creator and make the premium payments on time. When the grantor dies, the trustee must distribute the proceeds of the trust.
Life insurance often makes sense for anyone concerned about how their loved ones will fare once they pass. That said, it is understandable for you to want to limit the impact a policy has on your estate tax bill once you are gone. By working with a practiced estate attorney, you could avoid an unnecessary tax bill while still seeing your final wishes respected. Reach out to learn more about Wheaton irrevocable life insurance trusts today.
