Take a Bite Out of the Estate Tax: Estate Planning with Life Insurance
February 8, 2023
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Revocable trusts can simplify asset management during life and facilitate and make private asset transfers at death. You may think that your estate planning work is done when you sign your revocable trust agreement, but, to borrow from former New York Yankees catcher and manager Yogi Berra (or even more recently from singer Lenny Kravitz), the work "ain't over" at the signing. The primary benefits of revocable trusts only are available if a revocable trust is FUNDED during life. Unfortunately, experienced estate planning attorneys often have clients who delay the funding of their revocable trusts until it is too late and miss many of the benefits that these trusts provide. The transfer of appropriate assets to your revocable trust during life or "funding your revocable trust" is critical to accomplishing your complete estate planning objectives.
What is a Revocable Trust?
A trust is a legal arrangement that allows one person (a trustee) to hold and manage property for the benefit of one or more beneficiaries. As the term "revocable" indicates, you, as the "grantor," can create a revocable trust agreement during your lifetime and modify or terminate that agreement at any time. The agreement dictates how the assets in your trust should be managed and who should manage them. Typically, you, the grantor, would be the initial trustee of the revocable trust established under the trust agreement and the initial beneficiary of the revocable trust. These dual roles would allow you to maintain complete control and use of the trust assets during your life.
On your death, your revocable trust document becomes irrevocable and functions much like a Will. The trust agreement directs the distribution of assets, appoints a person responsible for managing the assets and carrying out your distribution instructions, and contains appropriate estate tax reduction planning. Unlike a Will, however, your revocable trust also is designed to hold your assets during your life. This ability to hold assets during your life affords estate planning opportunities for you that your Will cannot provide.
Why Fund a Revocable Trust?
If establishing a revocable trust is your game plan, then funding it is the execution. Simply put, the opportunities afforded by a revocable trust cannot be fully achieved unless your trust is funded. Funding your trust literally means transferring appropriate assets to your trust during your life. In appropriate circumstances, it also can include the direction of assets to the trust at death by beneficiary designation. Essentially, an asset-by-asset review should be performed to determine which assets should be transferred or made payable to your trust and what steps are necessary to complete such changes. The necessary steps should then be completed to ensure that you obtain the full benefit of your revocable trust.
Certain kinds of assets that are titled in your name almost always should be re-titled in the name of your revocable trust or directed to the trust by beneficiary designation. For example, your investment advisors should change the paperwork for any of your taxable investment accounts to reflect your trust as the owner. Moreover, Change of Beneficiary Forms for life insurance, IRAs, and retirement plans should be implemented in the appropriate circumstances to include such assets in your revocable trust's distribution scheme at your death.
What are the Benefits of a Funded Revocable Trust?
- Avoiding Probate.
Probate is the court-supervised process of distributing your assets at death, typically according to your Will. State statutes and regulations require a number of steps to be completed through the probate process that add time and effort to the administration of your estate. If your assets are owned by your revocable trust at your death, however, then legal title to the assets would be held by your trust, not by you, and the assets would not be subject to probate. The assets of your funded revocable trust would then be distributed to your beneficiaries without court involvement.
- Reducing Expense.
In addition to reducing time and effort, avoiding probate also reduces expenses. The expenses of a probate administration generally arise from two sources: probate fees and attorneys' fees. The probate fee in North Carolina can reach a maximum of $6,000 but does not apply to a funded revocable trust. Moreover, a funded revocable trust avoids the expense of hiring a lawyer to prepare probate-related filings. While your successor trustee likely would hire a lawyer to assist with the trust administration, the avoidance of the steps required for probate with your funded revocable trust could result in savings from $5,000 to $10,000, or more.
- Ensuring Privacy.
Unlike the terms of and assets that flow through a Will after death, your revocable trust's beneficiaries and assets (along with their values) are kept confidential. The terms of your Will and the required description and value of your assets become public record upon filing. Anyone with curiosity or motivation can request and review a probate file and obtain important information about your assets and beneficiaries. On the other hand, your revocable trust and its assets and beneficiaries never become public record.
Privacy can be particularly valuable if you are an owner of a closely-held business. If you die owning business interests individually, the description and value of the business interests must be reported on the public record during the probate process and are available to potential purchasers to use as leverage against your estate. If you transfer your business interests to your revocable trust during life, then none of that important closely-held business information would be revealed to the public.
- Asset Protection.
The use of a revocable trust also can increase the asset protection available to your beneficiaries for beneficiary-designated assets such as life insurance, IRAs, and retirement plans. For example, if a life insurance policy is paid to your estate, then creditors of your estate have access to the proceeds. If paid to your revocable trust, then creditors do not.
Each of these benefits is attractive. Together, they are powerful.
Summary
A revocable trust agreement can be an integral part of your estate plan. To obtain all of its benefits, however, you cannot stop after you sign your trust agreement. Funding your trust with appropriate assets during life is critical to obtain those benefits. Only after you complete the funding steps will this significant aspect of your estate plan be "over" and a more efficient, cost-effective, confidential, and protective estate plan in place.
For further information, please contact our Trusts & Estates team.
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This article is not intended to give, and should not be relied upon for, legal advice in any particular circumstance or fact situation. No action should be taken in reliance upon the information contained in this article without obtaining the advice of an attorney.
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