Citizens of the United States are charitable by nature if the statistics mean anything at all. American individuals, estates, foundations, and corporations gave an estimated $240.72 billion to charitable causes in 2003, according to Giving USA 2004, a study released by Giving USA Foundation. And the Charitable Remainder Trust (CRT) is one of the most popular ways to give to charities. According to the IRS, there are over 115,000 Charitable Remainder Trusts in the United States with assets of over $85 billion.
A Charitable Remainder Trust permits a donor to defer the income tax consequences on the sale of a capital gain property and make a charitable gift. The donor transfers property to the Trust, retaining the right to receive a stream of annual payments for a term chosen by the donor. At the donor’s death, the remaining assets go to the charity, thus the name Charitable Remainder Trust.
The two most common types are Charitable Remainder Annuity Trusts (CRATs) and Charitable Remainder Unitrusts (CRUTs).
To schedule your FREE estate planning consultation, please call our office today, 856-663-3800
For additional information, visit our website:
www.NJTrustLawyer.com
Wednesday, March 31, 2010
Friday, March 26, 2010
HOW DO YOU PROBATE A WILL IN NEW JERSEY?
Probate is Latin for “Prove the Will”. The purpose of Probate is to change title from the person who died to those that inherit. In order to Probate an estate certain steps must be taken.
A Will cannot be probated until ten (10) days following the death of the testator.
If you are named the executor (also known as the personal representative) under the Will, then its your duty to manage and distribute the estate pursuant to the testators wishes.
The first step is to probate the Will at the County Surrogate's Court. (The county where the testator was domiciled) To do this you must bring the following with you to the Surrogate's Court:
(1) the original Will (which should not be unstapled or tampered with);
(2) a certified copy of the death certificate (which you obtain from the municipality in which the testator died);
(3) the full names and latest addresses of the closest surviving family and anyone named in the Will; and
(4) a blank check, or a money order for probate fees. You should not fill in the amount of the check until your meeting at Surrogate's Court.
Most Wills drafted in the past 30 years are “self proving”. However, in the rare case where the Will is not "self-proving," then a person who signed the Will as a witness must also come to the Surrogate's Court to authenticate the Will.
A "self-proving" Will is one where the testator and two witnesses sign the Will in front of a Notary Public or New Jersey attorney and the Will contains special language provided in New Jersey law (self-proving affidavits). If a Will is "self-proving," there is no need for a witness to the signing (execution) of the Will to come to the Surrogate's Court to authenticate his or her signature because the Notary Public or New Jersey attorney, before whom the witness signed the Will, effectively attests to the authenticity of the witnesses' signatures.
To schedule your FREE one hour consulation,
please call our office 856-663-3800
For any additional information, please visit our website
www.NJTrustLawyer.com
Tuesday, March 23, 2010
Today's NJ Probate Answers
What Is a Family Limited Partnership?
In the past few years, the Family Limited Partnership (FLP) has gained popularity as an asset protection, tax planning, and estate planning vehicle. A Family Limited Partnership is a partnership made up of family members. Typically, the parents are the general partners, controlling the partnership and making all decisions. The limited partners are often children or grandchildren who receive gifts of partnership interests.
General Partnerships
In order to understand an FLP, it is best to first understand a General Partnership. A General Partnership is formed when two or more people intend to work together to carry on a business activity. No local or state filings are required to create this type of partnership. This is different than a corporation, which does not come into existence until Articles of Incorporation have been filed with the Secretary of State.
The distinguishing feature of a General Partnership is the unlimited liability of the partners. Each partner is personally liable for all of the debts of the partnership. That includes any debts incurred by any of the other partners on behalf of the partnership. Because each of the partners has unlimited personal liability, a General Partnership is the single most dangerous form for conducting one’s business. Not only is a partner liable for contracts entered into by other partners, each partner is also liable for the other partner’s negligence.
Limited Partnerships
A General Partnership has potentially harsh consequences for each general partner. One way around the unlimited liability is a type of partnership known as a Limited Partnership. A Limited Partnership consists of one or more general partners and one or more limited partners. The same person can be both a general partner and a limited partner, as long as there are at least two legal persons who are partners in the partnership. The general partner is responsible for the management of the affairs of the partnership, and he has unlimited personal liability for all debts and obligations.
Limited partners have no personal liability. The limited partner stands to lose only the amount which he has contributed and any amounts which he has obligated himself to contribute under the terms of the partnership agreement. The Family Limited Partnership (FLP) is one such Limited Partnership.
For more information, please call our office
856-663-3800 for your FREE estate planning consultation
or visit us online:www.NJTrustLawyer.com
In the past few years, the Family Limited Partnership (FLP) has gained popularity as an asset protection, tax planning, and estate planning vehicle. A Family Limited Partnership is a partnership made up of family members. Typically, the parents are the general partners, controlling the partnership and making all decisions. The limited partners are often children or grandchildren who receive gifts of partnership interests.
General Partnerships
In order to understand an FLP, it is best to first understand a General Partnership. A General Partnership is formed when two or more people intend to work together to carry on a business activity. No local or state filings are required to create this type of partnership. This is different than a corporation, which does not come into existence until Articles of Incorporation have been filed with the Secretary of State.
The distinguishing feature of a General Partnership is the unlimited liability of the partners. Each partner is personally liable for all of the debts of the partnership. That includes any debts incurred by any of the other partners on behalf of the partnership. Because each of the partners has unlimited personal liability, a General Partnership is the single most dangerous form for conducting one’s business. Not only is a partner liable for contracts entered into by other partners, each partner is also liable for the other partner’s negligence.
Limited Partnerships
A General Partnership has potentially harsh consequences for each general partner. One way around the unlimited liability is a type of partnership known as a Limited Partnership. A Limited Partnership consists of one or more general partners and one or more limited partners. The same person can be both a general partner and a limited partner, as long as there are at least two legal persons who are partners in the partnership. The general partner is responsible for the management of the affairs of the partnership, and he has unlimited personal liability for all debts and obligations.
Limited partners have no personal liability. The limited partner stands to lose only the amount which he has contributed and any amounts which he has obligated himself to contribute under the terms of the partnership agreement. The Family Limited Partnership (FLP) is one such Limited Partnership.
For more information, please call our office
856-663-3800 for your FREE estate planning consultation
or visit us online:www.NJTrustLawyer.com
Wednesday, March 17, 2010
What Is the Annual Gift Tax Exclusion?
What Is the Annual Gift Tax Exclusion?
Gifting money can be a very effective way to transfer substantial amounts from your estate, free from gift and estate taxes, to your children or other loved ones. This technique of estate tax planning can drastically reduce your taxable estate after your death, and could thereby reduce your associated estate taxes.
The Federal Government levies taxes on what they call “gratuitous transfers of assets.” These are financial gifts in the form of money, stocks, bonds, property, or anything else you wish to give. The gift tax can eat away your at your estate. In 2007 through 2009, you can make a lifetime gift up to $1 million without gift tax. After that, 45 percent of each dollar gifted goes in tax. In 2010, the rate is the same as the top income tax rate. After 2010, the tax effectively starts at 37 percent and goes up in increments to 55 percent.
Luckily, there are certain exceptions to the gift tax as outlined in Section 2503(b) of the IRS tax code. One such exception is the annual gift tax exclusion. This is an amount that can be given away annually without resulting in gift tax on the transfer. This gift exclusion renews every year and is in addition to the $1 million lifetime exclusion. As easy as this may sound, there are certain criteria you have to meet in order for your gift to qualify as an exclusion, and there are even exceptions to the exception!
Let’s take a look at the Annual Gift Tax Exclusion as well as some exceptions to the rule.
Give a Gift of $12,000
In the year 2007, the Annual Gift Tax Exclusion amount is $12,000 per recipient. There is no limit on the number of recipients to which qualifying gifts can be made. The key word here is qualifying. That’s right! Not every gift will qualify for the Annual Gift Tax Exclusion.
The IRS does not consider a gift to be qualified unless the person receiving the gift possesses a “present interest,” an immediate ownership, in the asset. This means that, in general, transfers in Trust are not considered present interests, but future interests.
The unlimited marital deduction is an entirely different kind of gifting that allows spouses to give their property to their spouse without incurring any gift taxes. This is not true, however, if the spouse is a not a U.S. citizen. In this case, the Annual Gift Tax Exclusion kicks in, but has a much higher value of $125,000.
Gift-Splitting By Married Taxpayers
If the donor of the gift is married, gifts made during a year can be treated as a "split" between the husband and wife, even if the cash or gift property is actually given by only one of them. By gift-splitting, therefore, up to $24,000 a year can be transferred to each recipient by a married couple because their two annual exclusions are available.
Where gift-splitting is involved, both spouses must consent to it. Consent should be indicated on the gift tax return(s) the spouses file. The IRS prefers that both spouses indicate their consent on each return filed. Since more than $12,000 is being transferred by a spouse, a gift tax return will have to be filed, even if the $24,000 exclusion covers the gifts. So, be aware that if you elect gift-splitting, you'll need to file IRS Form 709 gift tax return.
Giving to Minors
Oftentimes, when you choose to gift to a minor, you want to delay access to the gift but still receive the annual gift tax exclusion. Although typically, you have to give a present interest, there are approved vehicles for providing future interest. One such vehicle is the “Section 2503(c) Trust for Minors.”
In order for a gift to qualify under this Trust:
1. The money and interest in the Trust can be spent on the minor by the Trustee before the minor reaches the age of 21.
2. Any assets not spent by the time the minor turns 21 must be turned over to the minor.
3. If the minor dies before the age of 21, the assets in Trust must become part of the minor’s estate.
Another gifting strategy for minors is to establish a custodial account under the Uniform Gift to Minors Act (UGMA) or the Uniform Transfer to Minors Act (UTMA). Using this strategy, assets are placed in a custodian’s name for the benefit of a minor. This custodianship ends when the child reaches adulthood, at which time the custodian must give all the property to the child. Once again, if the minor dies before reaching adulthood, the assets will be placed in the child’s estate.
Another method is using a standard Irrevocable Trust, like a Life Insurance Trust, and give the beneficiary the right to withdraw the money for a period of 30 days. This “Crummey” power, named after the case approving its use, converts the future interest into a present interest.
Even with these different gifting strategies for minors, you are still only able to gift $12,000 per year per recipient. You can arrange for larger gifts by providing monies used for tuition, health care, and charities.
For more information, please visit our website www.NJTrustLawyer.com
Or to make an appointment for a FREE consultation, please call our office 856-663-3800.
The Federal Government levies taxes on what they call “gratuitous transfers of assets.” These are financial gifts in the form of money, stocks, bonds, property, or anything else you wish to give. The gift tax can eat away your at your estate. In 2007 through 2009, you can make a lifetime gift up to $1 million without gift tax. After that, 45 percent of each dollar gifted goes in tax. In 2010, the rate is the same as the top income tax rate. After 2010, the tax effectively starts at 37 percent and goes up in increments to 55 percent.
Luckily, there are certain exceptions to the gift tax as outlined in Section 2503(b) of the IRS tax code. One such exception is the annual gift tax exclusion. This is an amount that can be given away annually without resulting in gift tax on the transfer. This gift exclusion renews every year and is in addition to the $1 million lifetime exclusion. As easy as this may sound, there are certain criteria you have to meet in order for your gift to qualify as an exclusion, and there are even exceptions to the exception!
Let’s take a look at the Annual Gift Tax Exclusion as well as some exceptions to the rule.
Give a Gift of $12,000
In the year 2007, the Annual Gift Tax Exclusion amount is $12,000 per recipient. There is no limit on the number of recipients to which qualifying gifts can be made. The key word here is qualifying. That’s right! Not every gift will qualify for the Annual Gift Tax Exclusion.
The IRS does not consider a gift to be qualified unless the person receiving the gift possesses a “present interest,” an immediate ownership, in the asset. This means that, in general, transfers in Trust are not considered present interests, but future interests.
The unlimited marital deduction is an entirely different kind of gifting that allows spouses to give their property to their spouse without incurring any gift taxes. This is not true, however, if the spouse is a not a U.S. citizen. In this case, the Annual Gift Tax Exclusion kicks in, but has a much higher value of $125,000.
Gift-Splitting By Married Taxpayers
If the donor of the gift is married, gifts made during a year can be treated as a "split" between the husband and wife, even if the cash or gift property is actually given by only one of them. By gift-splitting, therefore, up to $24,000 a year can be transferred to each recipient by a married couple because their two annual exclusions are available.
Where gift-splitting is involved, both spouses must consent to it. Consent should be indicated on the gift tax return(s) the spouses file. The IRS prefers that both spouses indicate their consent on each return filed. Since more than $12,000 is being transferred by a spouse, a gift tax return will have to be filed, even if the $24,000 exclusion covers the gifts. So, be aware that if you elect gift-splitting, you'll need to file IRS Form 709 gift tax return.
Giving to Minors
Oftentimes, when you choose to gift to a minor, you want to delay access to the gift but still receive the annual gift tax exclusion. Although typically, you have to give a present interest, there are approved vehicles for providing future interest. One such vehicle is the “Section 2503(c) Trust for Minors.”
In order for a gift to qualify under this Trust:
1. The money and interest in the Trust can be spent on the minor by the Trustee before the minor reaches the age of 21.
2. Any assets not spent by the time the minor turns 21 must be turned over to the minor.
3. If the minor dies before the age of 21, the assets in Trust must become part of the minor’s estate.
Another gifting strategy for minors is to establish a custodial account under the Uniform Gift to Minors Act (UGMA) or the Uniform Transfer to Minors Act (UTMA). Using this strategy, assets are placed in a custodian’s name for the benefit of a minor. This custodianship ends when the child reaches adulthood, at which time the custodian must give all the property to the child. Once again, if the minor dies before reaching adulthood, the assets will be placed in the child’s estate.
Another method is using a standard Irrevocable Trust, like a Life Insurance Trust, and give the beneficiary the right to withdraw the money for a period of 30 days. This “Crummey” power, named after the case approving its use, converts the future interest into a present interest.
Even with these different gifting strategies for minors, you are still only able to gift $12,000 per year per recipient. You can arrange for larger gifts by providing monies used for tuition, health care, and charities.
For more information, please visit our website www.NJTrustLawyer.com
Or to make an appointment for a FREE consultation, please call our office 856-663-3800.
Friday, March 5, 2010
How Do I Know If My Estate Has Enough Liquidity?
What Is Estate Liquidity and Why Do I Need It?
Estate liquidity refers to the ability of your estate to pay taxes and other costs that arise after your death using cash and cash equivalents. If your property is mostly non-liquid (e.g., real estate, business interests), your estate may be forced to sell assets to meet its obligations as they become due.
Estates are often cash poor. Unless sufficient liquidity has been provided, the forced sale of non-liquid assets to pay settlement costs can compound estate shrinkage. In these situations, the buyer always has the upper hand. But even people of modest means who never considered themselves rich enough to need much estate planning can be in for a shock. In addition to having to settle-up with Uncle Sam and state tax collectors, creditors must be paid in full before a taxpayer's heirs can receive their inheritances.
Liquidity planning is part of estate planning. There are generally three ways to deal with the liquidity issue:
1. Reduce taxes by fully using the $2 million Applicable Exclusion Amount at death (for the year 2007), making annual gifts, and using planning techniques such as GRATs and QPRTs.
2. Reduce expenses by avoiding Probate and using a Living Trust.
3. Increase the cash and liquidity of the estate through conversion of assets and the use of life insurance.
Let’s look briefly at all of these techniques.
Reducing Taxes Through the Applicable Exclusion Amount and Gifting
You can give assets with unlimited values to your spouse, as long as your spouse is a U.S. citizen, and to qualified charities. Gifts totaling up to $12,000 (in the year 2007) can be made to any number of individuals in each calendar year. Gifts that do not qualify for the marital deduction, charitable deduction, or $12,000 annual exclusion are taxable gifts, but no gift tax has to be paid until your cumulative lifetime gifts exceed the "applicable exclusion."
Upon death, your Gross Estate includes the current fair market value of all property interests held by you at the time of your death. There are deductions for debts, administrative expenses, qualified transfers to spouses, and transfers to qualified charities. The net amount is the taxable estate. To the extent the applicable exclusion has not been utilized for lifetime gifts, it will be applied to the taxable estate. The applicable exclusion amount for 2007 is $1 million in gift tax and $2 million in estate tax.
The way to reduce taxes is to use the applicable exclusion amount to its fullest while still applying the unlimited marital deduction. Simply leaving your assets to your spouse will create a higher tax burden since your applicable exclusion amount will be forfeited. A qualified estate planning attorney can help you determine the best way to minimize taxes using the applicable exclusion amount.
Reducing Taxes Using a Grantor Retained Annuity Trust
A Grantor Retained Annuity Trust (GRAT) is a tax-saving Irrevocable Trust in which you transfer property to a Trust, but receive a fixed income stream until termination, at which time the Trust’s remainder beneficiaries receive the assets. A GRAT is used to reduce gift taxes on the transfer of assets to the next generation. It is best used with highly-appreciating assets, including closely-held stock.
The value of the gift is determined when the Trust is funded, so any appreciation of the assets passes gift tax-free to the remainder beneficiaries. However, the funding of the GRAT is a taxable gift from you.
The principal advantages of a GRAT include:
• The appreciation of the assets is moved out of the estate and avoids gift tax.
• Gift taxes are greatly reduced.
• Compared with a direct gift, you maintain control of the assets for a longer period.
• You maintain some or all of the income from the transferred assets for the term of the GRAT.
• So long as you survive the term of the GRAT, the assets used to fund the GRAT are not taxed in your estate upon your subsequent death.
Two cautions apply to a GRAT, however:
1. If you die during the Trust term, all or most of the Trust assets would be included in your estate. Therefore, the Trust term must be carefully selected to provide a great likelihood that you will outlive the term of the Trust.
2. You will lose the economic benefit of the assets during some portion of your remaining lifetime.
Reducing Taxes Using a Qualified Personal Residence Trust
Your residence is probably your most important asset. Traditionally, the home has been a good financial investment. It has been an investment that has risen steadily over the past several decades with less volatility than the stock market. The home also has important attributes from tax, estate planning, and asset protection perspectives. Your home can enable you to do advanced estate planning such as a Qualified Personal Residence Trust (QPRT).
With a QPRT, you can make a gift of an interest in the home to your children. If your home grows in value faster than the interest rate assumed by the IRS, the additional growth is passed without any tax. During the term of the QPRT, you can continue to live in the home.
A QPRT is an Irrevocable Trust that allows you to retain the exclusive use of the residence for a term of years selected by you. If you survive the term of the Trust, the QPRT terminates and the residence is either retained in further Trust for, or distributed to, one or more third-party beneficiaries, such as your children or grandchildren.
The QPRT has no income tax consequences during the term of the Trust. You may still use the principal residence capital gain exclusion and deduct mortgage interest and property taxes. During the term of the Trust, you may sell the house and purchase a replacement residence. If the residence sold is not replaced, the QPRT pays an annuity to you.
The "catch" is that after the term of the Trust, you will no longer have the right to live in the residence. At this point, the beneficiaries could lease the residence for fair rental value to you.
For more information, or to register for a FREE estate planning seminar,
please visit our website:
www.NJTrustLawyer.com
Estate liquidity refers to the ability of your estate to pay taxes and other costs that arise after your death using cash and cash equivalents. If your property is mostly non-liquid (e.g., real estate, business interests), your estate may be forced to sell assets to meet its obligations as they become due.
Estates are often cash poor. Unless sufficient liquidity has been provided, the forced sale of non-liquid assets to pay settlement costs can compound estate shrinkage. In these situations, the buyer always has the upper hand. But even people of modest means who never considered themselves rich enough to need much estate planning can be in for a shock. In addition to having to settle-up with Uncle Sam and state tax collectors, creditors must be paid in full before a taxpayer's heirs can receive their inheritances.
Liquidity planning is part of estate planning. There are generally three ways to deal with the liquidity issue:
1. Reduce taxes by fully using the $2 million Applicable Exclusion Amount at death (for the year 2007), making annual gifts, and using planning techniques such as GRATs and QPRTs.
2. Reduce expenses by avoiding Probate and using a Living Trust.
3. Increase the cash and liquidity of the estate through conversion of assets and the use of life insurance.
Let’s look briefly at all of these techniques.
Reducing Taxes Through the Applicable Exclusion Amount and Gifting
You can give assets with unlimited values to your spouse, as long as your spouse is a U.S. citizen, and to qualified charities. Gifts totaling up to $12,000 (in the year 2007) can be made to any number of individuals in each calendar year. Gifts that do not qualify for the marital deduction, charitable deduction, or $12,000 annual exclusion are taxable gifts, but no gift tax has to be paid until your cumulative lifetime gifts exceed the "applicable exclusion."
Upon death, your Gross Estate includes the current fair market value of all property interests held by you at the time of your death. There are deductions for debts, administrative expenses, qualified transfers to spouses, and transfers to qualified charities. The net amount is the taxable estate. To the extent the applicable exclusion has not been utilized for lifetime gifts, it will be applied to the taxable estate. The applicable exclusion amount for 2007 is $1 million in gift tax and $2 million in estate tax.
The way to reduce taxes is to use the applicable exclusion amount to its fullest while still applying the unlimited marital deduction. Simply leaving your assets to your spouse will create a higher tax burden since your applicable exclusion amount will be forfeited. A qualified estate planning attorney can help you determine the best way to minimize taxes using the applicable exclusion amount.
Reducing Taxes Using a Grantor Retained Annuity Trust
A Grantor Retained Annuity Trust (GRAT) is a tax-saving Irrevocable Trust in which you transfer property to a Trust, but receive a fixed income stream until termination, at which time the Trust’s remainder beneficiaries receive the assets. A GRAT is used to reduce gift taxes on the transfer of assets to the next generation. It is best used with highly-appreciating assets, including closely-held stock.
The value of the gift is determined when the Trust is funded, so any appreciation of the assets passes gift tax-free to the remainder beneficiaries. However, the funding of the GRAT is a taxable gift from you.
The principal advantages of a GRAT include:
• The appreciation of the assets is moved out of the estate and avoids gift tax.
• Gift taxes are greatly reduced.
• Compared with a direct gift, you maintain control of the assets for a longer period.
• You maintain some or all of the income from the transferred assets for the term of the GRAT.
• So long as you survive the term of the GRAT, the assets used to fund the GRAT are not taxed in your estate upon your subsequent death.
Two cautions apply to a GRAT, however:
1. If you die during the Trust term, all or most of the Trust assets would be included in your estate. Therefore, the Trust term must be carefully selected to provide a great likelihood that you will outlive the term of the Trust.
2. You will lose the economic benefit of the assets during some portion of your remaining lifetime.
Reducing Taxes Using a Qualified Personal Residence Trust
Your residence is probably your most important asset. Traditionally, the home has been a good financial investment. It has been an investment that has risen steadily over the past several decades with less volatility than the stock market. The home also has important attributes from tax, estate planning, and asset protection perspectives. Your home can enable you to do advanced estate planning such as a Qualified Personal Residence Trust (QPRT).
With a QPRT, you can make a gift of an interest in the home to your children. If your home grows in value faster than the interest rate assumed by the IRS, the additional growth is passed without any tax. During the term of the QPRT, you can continue to live in the home.
A QPRT is an Irrevocable Trust that allows you to retain the exclusive use of the residence for a term of years selected by you. If you survive the term of the Trust, the QPRT terminates and the residence is either retained in further Trust for, or distributed to, one or more third-party beneficiaries, such as your children or grandchildren.
The QPRT has no income tax consequences during the term of the Trust. You may still use the principal residence capital gain exclusion and deduct mortgage interest and property taxes. During the term of the Trust, you may sell the house and purchase a replacement residence. If the residence sold is not replaced, the QPRT pays an annuity to you.
The "catch" is that after the term of the Trust, you will no longer have the right to live in the residence. At this point, the beneficiaries could lease the residence for fair rental value to you.
For more information, or to register for a FREE estate planning seminar,
please visit our website:
www.NJTrustLawyer.com
Tuesday, March 2, 2010
Today's Probate Answers
What Is an Irrevocable Life Insurance Trust?
An Irrevocable Life Insurance Trust (ILIT) is an estate planning technique, often used to ensure that life insurance proceeds will not be subject to federal estate tax. The ILIT is used to hold a life insurance policy or policies outside of an estate.
If you own a life insurance policy, the Internal Revenue Service will add the amount of the life insurance benefit to the amount of your taxable estate and calculate the tax based upon that value. This may seem unfair since the death benefit is usually not paid to your estate, but to someone else instead.
The ILIT, if properly prepared, creates a separate legal entity from your estate. Since the life insurance will be part of the ILIT and not part of your estate, it will not be subject to estate tax.
Why Should I Consider Having an ILIT?
1. The value of everything you own (called your "estate"), including the death benefit of your life insurance policies, will be over $2 million at the time of your death if you are single, or over $4 million at the time of your death if you are married and if you have a Revocable Living Trust; or
2. Your estate consists of a business or other substantial assets that cannot be easily liquidated (converted to cash). If the size of your estate is over a certain amount, there may be taxes that must be paid to the IRS. The IRS wants payment in cash. If your estate does not include sufficient cash to pay the taxes, something will have to be liquidated (sold). An ILIT holding sufficient amounts of life insurance will provide the cash needed to pay estate taxes and the expenses of administering your estate.
How Does an ILIT Work?
To work, an ILIT must involve the creation of an Irrevocable Trust. This means that a Trust is created, and the Trust cannot be revoked, modified or changed after it is created. Thoughtful care and planning must go into the creation of such a Trust.
Additionally, neither you nor your spouse (if also an insured) can serve as Trustee. In order to exclude the ILIT from your estate, you may not have any "incidents of ownership." After the Trust is created, you cannot control it. Trustees are most often the beneficiaries of the Trust or a financial advisor.
The Trust can be created so that life insurance is obtained with a single premium, or with premiums paid over a period of time. If premiums are paid over a period of time, a special method is used to fund the ILIT. Using a Crummey power, money is gifted to the Trustee who in turn pays the insurance company. Whenever a gift is made, the Trustee must send a special letter, called a "Crummey Letter," to the beneficiaries of the Trust letting them know that they have the opportunity to remove their portion of the gift within a specified period of time. When they don’t exercise their option, your Trustee will use the money to pay your insurance premium.
Benefits of an ILIT
Even with a Revocable Living Trust, an estate over $2 million ($4 million for couples) will face federal estate taxes at rates of 45 percent in 2007. If you own a life insurance policy, the proceeds will be added to your taxable estate upon death, subject to federal estate taxes.
At convenient annual intervals, you will transfer money to the ILIT for the Trustee to use to pay the insurance premiums. Ordinarily this money would be subject to gift taxes, but if the beneficiaries of the ILIT have real access to these funds, the transfer will qualify for the $12,000 annual gift tax exclusion. When the benefits of the ILIT are explained, beneficiaries almost never demand disbursement.
Upon your death, the policy proceeds are paid to the ILIT, and are not a part of your estate. The funds can be used to increase the liquidity in the estate by purchasing estate assets for cash, they can be "loaned" to the estate to pay off liabilities, they can be held in Trust for the beneficiaries, or they can be distributed pursuant to the terms of the ILIT.
The ILIT provides you control over how proceeds from your life insurance policy are spent. With the ILIT, you control who receives the proceeds, and how they receive it. Whatever distribution strategy makes most sense for you and your loved ones, the ILIT gives you the opportunity to put it into effect.
Since the cash value of the insurance policy is held by the ILIT, it is typically out of reach of your creditors.
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