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 special type of trust known as an Irrevocable Life Insurance Trust, or ILIT. The Indianapolis estate planning attorneys at Frank & Kraft explain how an Irrevocable Life Insurance Trust works and why you might want to include one in your funeral planning component.
Why Is Funeral Planning Important?
Contemplating your own funeral is not something most of us look forward to doing; however, funerals are typically complicated and expensive. Experts tell us that, on average, you can expect to pay $10,000 for a relatively modest funeral and burial service. 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. 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.
Benefits of an Irrevocable Life Insurance Trust Work
A common funeral planning tool 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 Indianapolis Estate Planning Attorneys
For more information, please download our FREE estate planning worksheet. If you have additional questions or concerns about creating an Irrevocable Life Insurance Trust, contact the experienced Indianapolis estate planning attorneys at Frank & Kraft by calling (317) 684-1100 to schedule an appointment.