Articles Posted in Irrevocable Life Insurance Trust

Estate planning relies on a countless number of assumptions. One assumption is that assets only flow in one direction: from older person to younger person. In reality, this does not always have to be the case. By making the most of some unconventional estate planning techniques, people can realize some tax and estate planning advantages. This is where the concept, of “reverse estate planning” comes in.

Some adult children who have more assets than parents and can help take care of the older generation. In these cases, reverse estate planning can play a valuable role. This is particularly true when parents will not be able to use the entirety of their estate and gift tax exemptions. This is just as true if a parent is in a lower tax bracket than their child. 

Tax Advantages through Reverse Estate Planning

You might have considered utilizing a living trust. Often, these trusts are a good idea if a person wants to maintain assets for loved ones without subjecting assets to significant taxes or probate.

In reality, however, people often forget a whole range of other types of trusts including revocable and irrevocable living trusts. The type of trust you utilize can make a big difference in the outcome of your estate. Pick the right type of trust and you can really simplify the estate planning process. Pick the wrong trust and you can end up facing a range of complications.

Revocable means revisable, while irrevocable means a person cannot later changes a trust’s terms barring a few exceptions. A revocable trust lets the trust creator modify the trust at some later date. With irrevocable trusts, a person lacks the ability to modify the terms of the trust. 

Over half the marriages in the United States result in divorce. For many people, divorce ends up being one of the most difficult experiences in their life. As a result, when attorneys present a person with divorce paperwork, this individual often fails to consider every little detail of how it will impact their life and does not update their estate plan. Unfortunately, failing to update estate planning documents after divorce could lead to many undesirable complications

A Hypothetical Situation

Imagine, a couple who got married in 2005. The wife had one daughter from a previous marriage. Even though the husband never officially adopted the girl, he treated the girl as she were his daughter during the marriage. A joint trust even referred to the girl as the couple’s “only living child” and named the girl as a residuary beneficiary. These terms have substantial meaning under the law and not considering these statements after a divorce can create substantial challenges.

In the recent case of Riverside County Public Guardian v. Snukst, a California appellate Court resolved an issue involving the Medi-Cal program, which is California’s version of the federal Medicaid program. The program is overseen by the California Department of Health Services. In Riverside, the Department of Health Services pursued payment from a revocable inter vivos trust for the benefits provided on behalf of a person during his life. After the man’s death, the probate required the assets in the revocable inter vivos trust be passed on to the sole beneficiary instead of the Department of Health. 

The Court of Appeals determined that federal and state law involving revocable inter vivos trusts required the Department of Health receive funds from the trust before any distribution to the beneficiary. Subsequently, the judgment was reversed and remanded.

For trusts to work as a person wants, the trust must avoid future disagreements and disputes among those impacted by the trust’s terms. This article reviews some of the best things that you can do to avoid trust disputes.

Many in our area have decided to visit a New York estate planning attorney this year in order to learn how they can take advantage of Tax Relief Act which President Obama signed in December. As many are aware, the law allows individuals to give gifts up to $5 million without triggering any tax losses. Couples can give twice that amount. This is five times more than under previous law. The rule changes only apply until 2012, however, so it remains vital that all families take advantage of this favorable condition while they still can.

Worth.com recently provided a nice summary of a few ways that residents can act while the tax law is in effect. Perhaps the simplest way to use the increased exemption rate is to give a gift to a responsible adult child or grandchild. If you were considering creating a portfolio for a loved one, now might be the ideal time to do it.

Also, this year is the perfect time to create an irrevocable life insurance trust, because the trust can be funded with the new $5 million exemption. Even without the increased tax-free amount these trusts are important parts of an estate plan. They pay for life insurance premiums and can also be used to help settle how much each heir will receive in the future.

Another option might be the creation of a qualified personal residence trust (QPRT). The QPRT is helpful for those who have value tied into residential property. If the individual seeks to have their children own that property than the new law is helpful because it allows them to allocate a larger amount to this trust. A defective grantor trust may be used this year to take advantage of the exemption. As the article notes, “if you seed a defective grantor trust with, say, $1 million, then sell assets worth up to nine times that amount with the trust issuing a note to the grantor, any gains in the trust assets in excess of the note’s interest grow tax-free.”
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Historically, charitable giving rises about one-third as fast as the stock market. While the stock market gains of 2010 remain slight (Dow is up 1.13% at the time of this writing), New York residents may still want to consider using the charitable remainder trust (CRT) in their estate planning.

This trust works well for those who:

• hold highly appreciated assets • desire an income stream off of the assets • want to donate to charity; and • achieve tax benefits.

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