Funeral planning may not be the first thing you think about when you contemplate your estate plan; however, it is something that you should consider including. If you do decide to incorporate a funeral planning component in your estate plan you may choose to create a funeral trust. For those who are not familiar with them, the Carmel estate planning attorneys at Frank & Kraft explain how a funeral trust works.
Why Is Funeral Planning Important?
Thinking of your death and funeral in terms of the cost may be difficult to do; however, the reality is that dying is expensive. Moreover, by addressing the issue ahead of time you are able to prepare your estate and your loved ones for the eventuality of your death and the associated expenses. Experts tell us that, on average, you can expect to pay around $10,000 for a relatively modest funeral and burial service. Of course, purchasing a high end casket, planning a larger service, or adding in a more elaborate tombstone will increase the overall cost. While there are several ways in which you and pre-fund your funeral and burial, a specialized trust known as an Irrevocable Life Insurance Trust (ILIT) is a common choice.
How Does a Trust Work?
A trust is a fiduciary legal arrangement that allows a third party, referred to as a Trustee, to hold assets on behalf of a beneficiary or beneficiaries. The person who creates a trust is referred to as the “Settlor”, “Trustor” or “Grantor.” The Settlor transfers property to a Trustee, appointed by the Settlor. The Trustee holds that property for the trust’s beneficiaries as well as invests trust assets and administers the trust terms according to the terms created by the Settlor. Trusts all fall into one of two categories – testamentary or living trusts. A testamentary trust is activated by a provision in the Settlor’s Will at the time of death whereas a living trust activates once all formalities of creation are in place and the trust is funded. Living trusts can be further divided into revocable and irrevocable living trusts. Because a testamentary trust is activated by a provision in the Settlor’s Will, and a Will can always be revoked up to the time of the Testator’s death, a testamentary trust is also revocable up to that point.
How Does an Irrevocable Life Insurance Trust Work?
One of the most common tools use in funeral planning is an Irrevocable Life Insurance Trust (ILIT). An ILIT is a highly specialized trust that provides tax advantages along with the general benefits you get from a trust. Life insurance proceeds usually pass to the named beneficiary free of any income tax; however, the payout from a life insurance policy is generally included in the “gross estate” of the policy owner for estate tax purposes at the policy owner’s death and is potentially subject to federal and state estate taxes. At a tax rate of 40 percent, gift and estate taxes should be avoided whenever possible. An ILIT takes advantage of a loophole created by Congress. If an ILIT is created to own the life insurance policy and the proceeds of the life insurance policy are payable to the trustee of the ILIT upon the insured’s death, then the proceeds are not included in the insured’s estate and, therefore, are not taxable for federal estate tax purposes. This applies even though the insured gives the money to the Trustee of the ILIT to pay the annual premiums of the life insurance policy.
Along with using an ILIT to provide the funding for your funeral and burial, however, you can also use the trust terms to ensure that your burial and funeral are carried out according to your wishes. For instance, you can use the terms to specify where you want to be buried or that you want to be cremated. You can be extremely detailed — providing a list of music, dictating the guest list, and choosing the flowers – or keep it general. Your Trustee will be legally obligated to abide by those terms once the trust activates. This all but eliminates the possibility of conflict over the details of your funeral and burial.
Contact the Carmel Estate Planning Attorneys
For more information, please download our FREE estate planning worksheet. If you have additional questions or concerns about creating a funeral planning trust, contact the experienced Carmel estate planning attorneys at Frank & Kraft by calling (317) 684-1100 to schedule an appointment.