Utilizing Irrevocable Trusts For Estate Planning

The following article will cover:

• The concept and benefits of an Irrevocable Insurance Trust.
• An overview of the purpose of an Irrevocable Trust for Minors.
• The necessary documents to put in place to provide care for minor children in the event of both parents’ incapacity or death in California.

What Is An Irrevocable Insurance Trust?

An Irrevocable Insurance Trust, commonly known as an Irrevocable Life Insurance Trust (ILIT), is a legal document designed to hold a life insurance policy without the client being the owner. Instead, the trustee owns the policy. Key features of an ILIT include:

• The client sets up the trust naming a third-party the trustee, and the trustee applies for life insurance.
• The client contributes funds to pay the premium.
• The trust is irrevocable, and the client does not retain control over it.

At the client’s death, the policy pays off, and the funds go into the trust without being considered part of the client’s estate for tax purposes. This arrangement creates a fund to pay estate taxes while keeping the policy proceeds separate from the taxable estate.

Why Would I Need The Document?

An ILIT is primarily an estate planning tool for large estates where a taxable estate is anticipated. Currently, the estate tax exemption is quite high ($12,920,000 for individuals and $25,840,000 for couples), but it is scheduled to decrease to about half in 2025. This change may expose more “modest estates,” particularly in California, to estate taxes. However, the ILIT’s primary purpose is to:

• Address potential estate taxes for large estates
• Create a fund to pay estate taxes without increasing the taxable estate

While ILITs are typically used for estate tax planning, they can also be used to set aside assets for grandchildren or other beneficiaries, regardless of estate tax considerations.

What Is An Irrevocable Trust For Minors?

An irrevocable trust for minors is a legal mechanism in which a client establishes an irrevocable trust, gifting assets to a third-party trustee to manage for the benefit of a minor. The trust is irrevocable, meaning the client cannot influence the trust after its creation. The primary reasons for establishing this type of trust are:

1. To protect the assets for the minor, who may be too young or immature to receive the gift outright.
2. To create a generation-skipping trust that allows the assets to bypass the client’s children and directly benefit the grandchildren, thereby avoiding estate taxes for one generation.

What Documents Do We Need In Place To Provide Care For Our Minor Children If Both Parents Become Incapacitated Or Die In California?

To ensure proper care for your minor children in the event of both parents’ incapacity or death, consider the following steps:

1. Nominate a guardian of the child’s person: This person will be responsible for the child’s well-being, including providing a home, deciding where they live, and making medical decisions.
2. Appoint a guardian of the child’s estate: This person will manage any assets inherited by the child. This appointment is helpful even if a trust exists, as there may be stray assets not managed by the trust.
3. Establish a living trust: A well-drafted living trust can manage assets for your children even while you’re alive, ensuring their financial stability.
4. Prepare a parental consent document (optional): This document is useful when children travel without their parents, granting temporary guardians the authority to engage with healthcare professionals in case of illness or injury.

By putting these documents in place, you can help ensure your minor children receive proper care and support should anything happen to both parents. For more information on Utilizing Irrevocable Trusts For Estate Planning, an initial consultation is your next best step.