Smith 
Earlier, we covered the concept of designated beneficiaries in estate planning. Remember, accounts with designated beneficiaries that avoid probate are not subject to public disclosure.
A trust is an arrangement where a trustee manages assets on behalf of beneficiaries. It’s set up by a trustor, who transfers the title of certain assets to the trust. Trusts bypass the probate process and come with various benefits, depending on the type.
Special Needs Trust (also known as Supplemental Needs Trust)
This type of trust is designed to set aside assets for someone with a disability, ensuring they still qualify for government assistance. It must be an irrevocable trust created while you’re still alive.
A spendthrift trust is similar but can be either revocable or irrevocable. It aims to protect the beneficiary from reckless spending. You can set rules for withdrawals, like a specific percentage or dollar amount, and define circumstances allowing additional withdrawals. It’s wise to use additional rules cautiously to prevent disputes.
Estate Tax Exemption Increased
In 2023, the estate tax exemption is $12.92 million for individuals or $25.84 million for married couples. Even though your estate might not be taxed if it’s under this amount, it’s important to plan, especially for large or complex estates. Estate planning helps reduce or eliminate estate taxes, avoid probate, ensure your assets are distributed as you wish, and provide for minor children or disabled adults.
Bypass Trust
This trust preserves the estate tax exemption of the first spouse to pass away while providing income for the surviving spouse. It’s set up to receive the exemption amount when the first spouse dies, allowing the surviving spouse to withdraw 5% or $5,000 annually, with some exceptions for additional withdrawals. There’s no step-up in basis after the initial transfer, so capital gains may be due when the assets are sold. The potential savings in estate taxes often outweigh the cost of setting up these trusts.
Irrevocable Life Insurance Trust (ILIT)
Contrary to popular belief, life insurance proceeds can be taxable if they make up part of the deceased’s estate. An ILIT owns the insurance policies instead of you, so proceeds are not part of your estate. It typically includes provisions to support the surviving spouse first, then the next beneficiaries.
Gift Tax Exclusions
You can gift up to $17,000 per year per recipient without paying taxes. This might seem small, but it adds up quickly when multiple recipients are involved. For instance, if you have children, their spouses, and grandchildren, you can give a significant amount each year. Additionally, tuition payments for grandchildren can be made tax-free.
The Bottom Line
Life insurance can provide necessary funds for an illiquid estate, helping avoid the forced sale of assets like a house or business. It’s useful when a property needs to be divided among multiple beneficiaries or when you want to ensure fair treatment among heirs. Estate planning helps preserve the assets you’ve worked hard to accumulate. Always consult a knowledgeable trust attorney to navigate the latest laws and make the best decisions for your situation.
