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 several 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 their 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 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 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 can also be used to manage the trust assets by a successor trustee if the grantor who created the trust becomes incapacitated.
For example, banks may freeze 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 or probate must be obtained to lift the freeze. However, 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 trust’s gross income is $600 or more. Depending on the number of assets in the trust, the trust may not accumulate a gross income of $600 if the assets are distributed outright to the beneficiaries right after the grantor’s death.
Lastly, it’s wise to have a will, even if most assets are in a living trust or are in IRAs and other retirement accounts. That is because there may be some assets 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.
Reference: nj.com (June 15, 2021) “Should I terminate this trust, and do I need a will?”