15 Jun Should I terminate this trust and do I need a will?

Q. Years ago when my family was still young and the estate tax limit was $667.000, I created a revocable and an irrevocable life insurance trust (ILIT) to take care of my loved ones after my death. Now everyone is financially independent and the value of my estate is way below the taxable threshold of $11.7 million. Should I terminate these trusts and just have my children as beneficiaries of my investment accounts and life insurance? I understand that by doing so, the beneficiaries will get a step-up basis at my death and pay taxes at their own rates, not at the trust rate. And would I need a will if all the accounts have my children as stated beneficiaries? Also, the ILIT was funded with a term life insurance policy that is going to expire soon.
— Planning

A. There are a couple of issues to unpack here.

First, the purpose of an irrevocable life insurance trust (ILIT) is to own and control term or permanent life insurance policies so that the policy proceeds are not included in the insured’s taxable estate upon his or her death.

Although the current federal estate tax exemption amount is $11.7 million per person, the law is scheduled to expire on Dec. 31, 2025, and will return to an exemption of $5 million, adjusted for inflation, said Shirley Whitenack, an estate planning attorney with Schenck, Price, Smith & King in Florham Park.

It’s unclear whether Congress will change the proposed exemption amount when the law sunsets, she said.

Given that your ILIT is funded with a term policy that is set to expire soon, it may be easier to let the policy owned by the ILIT to expire, thereby rendering the ILIT immaterial, Whitenack said.

“The provisions of the ILIT will govern the procedure for the termination of the trust, which may be simple or onerous,” Whitenack said, noting you should consult with an estate planning attorney to who can look more closely at the trust’s language.

Let’s look at your other assets

A revocable living trust allows the person creating the trust to control the assets in the trust and to avoid probate, Whitenack said. It also can be used to manage the trust assets by a successor trustee in the event the grantor who created the trust becomes incapacitated.

“Banks in New Jersey may freeze 50% of the assets in an estate upon the owner’s death to ensure that any estate or inheritance taxes that may be due are paid,” she said. “A tax waiver must be obtained to lift the freeze.”

Assets in a trust, however, are not subject to a similar freeze, she said.

Upon the grantor’s death, a trustee must pay income tax if the gross income of the trust is $600 or more, she said. Depending on the amount of assets in the trust, the trust may not accumulate gross income of $600 if the assets are distributed outright to the beneficiaries soon after the death of the grantor.

“Finally, it’s a good idea to have a will even if the majority of assets are in a living trust or are in IRAs and other retirement accounts,” she said. “This is because there may be some assets that are outside the trust or retirement account or a need for a personal representative of the estate to handle tax or other types of refunds.”

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This story was originally published on June 15, 2021.

NJMoneyHelp.com presents certain general financial planning principles and advice, but should never be viewed as a substitute for obtaining advice from a personal professional advisor who understands your unique individual circumstances.