For most New Yorkers a will is all the estate planning they will ever need. Under the current Federal estate tax laws you can pass up to $5,340,000.00 as an individual and $10,680,000.00 as a married couple to your heirs through your estate without any Federal estate tax liability. In previous years, the Federal estate tax of 40% kicked in on any and all estate assets valued at $1,000,000.00 or more. Historically the Federal estate tax was something every NY estate lawyer had to contend with while planning their client’s estates.

As such, a NY estate lawyer’s job is simpler now that the Unified Credit is $10,680,000.00. For any and all estates under the ten million dollar mark, a basic will should suffice. Perhaps minor estate planning to minimize any and all New York State estate tax exposure, which applies to estates in excess of $1,000,000.00 in NY may be required as well. Although The New York State estate tax is a relatively minor nuisance as compared to the Federal Estate Tax in the estate planning process.

While a will and health care proxy are more than enough for most client’s estate planning needs, some clients present distinctive challenges that require additional NY estate planning. For example, there are times when a NY estate lawyer is presented with unique clients with large sums of money in their estates that have done little or no estate planning. This is when Irrevocable Trusts become invaluable.

What is an Irrevocable Trust?

When a NY estate lawyer in confronted by certain challenges as mentioned above, it is important to begin removing assets from their estate. The best way to do that sometimes is with an Irrevocable Trust. An Irrevocable Trust is a separate entity where you can place your assets so that they may pass outside of your estate. Normally, I would not suggest forming an Irrevocable Trust as the income these assets produce within the trust is heavily taxed. Additionally, while assets in an Irrevocable Trust are no longer in your estate for estate tax purposes they do not benefit from the advantages afforded to estate assets mainly, the stepped up basis. A stepped up basis is discussed at length in our September 18, 2013 article here and prevents your beneficiaries from having to incur the dreaded 20% capital gains tax on any and all underlying appreciation of your assets.

While a good NY estate lawyer should be hesitant before forming an Irrevocable Trust there is a time and a place to start thinking about it. For instance, if my client was advanced in age, had no spouse, her assets are in excess of the $5,340,000.00 Unified Credit and she had already exhausted her gift tax exemption I would have no choice but to recommend Irrevocable Trust formation. At this point it is clear that inaction would trigger an estate tax liability of more than 60% between Federal and New York State Estate tax liabilities. The only solution is to begin removing assets

from this client’s estate by forming an Irrevocable Trust.

Shortfalls of the Irrevocable Trust?

The Irrevocable Trust is not without its shortfalls. For instance, the grantor loses any and all control of the assets he or she places in the Trust. If the IRS finds what they call incidents of ownership, that the grantor maintained even a small amount of control, the trust will fail and all the assets will revert back into the estate. Another complication of the Irrevocable Trust is cooperative apartment houses usually prohibit shares of their coops from being transferred into trust under any circumstances. As stated above any and all income produced from the trust will be taxed at the highest income and capital gains tax rates allowed. Additionally, the Irrevocable Trust can be both a complex and expensive mess to both form and maintain. Furthermore, another pitfall to forming an irrevocable trust is the 36 month look back period. The grantor, creator of the Irrevocable Trust, must survive 3 years following the trust’s formation for the trust to be effective. If the grantor does not survive the Irrevocable Trust fails and the assets come back into the estate for estate tax purposes.

Benefits of the Irrevocable Trust?

Any experienced NY estate lawyer will tell you Irrevocable trusts are not for the faint of heart. However if the need arises, the Irrevocable Trust when set up properly by a NY estate lawyer can do something incredible. The Irrevocable Trust can remove estate assets from your estate thereby minimizing the estate tax liability of your heirs. This can literally save your heirs immeasurable amounts of money.

Additionally, contrary to popular belief Irrevocable Trusts are not always Irrevocable. If the trustee decides to destroy the trust, he can collapse the trust with the consent of any and all beneficiaries of the Irrevocable Trust in New York.

What is an Irrevocable Life Insurance Trust (ILIT)?

Irrevocable Trusts come in many shapes and varieties depending on your need. An experienced NY estate lawyer should know which type of Irrevocable Trust is right for you. Desperate times call for desperate measures and when all else fails, the Irrevocable Life Insurance Trust also known as the ILIT is a great place to turn. The Irrevocable Life Insurance Trust is just that, the formation of an Irrevocable Trust to maintain a life insurance policy. If you think about it, payouts on life insurance are only taxable events as estate assets. Meaning if you receive the payout of a life insurance policy as an individual your tax liability is $0.00. However if you receive a payout in the form of an estate asset, it may be subject to estate tax liability in excess of 60%. Luckily payouts on insurance policies are not taxable events when maintained in Irrevocable Trusts. Thus by funding an Irrevocable Trust and by paying the premiums on the life insurance policy out of the trust, you are both reducing the amount of money in your estate while increasing the future value of your Irrevocable Trust. The main benefit is that while the proceeds of the life insurance policy are only taxable as estate assets, your heirs receive the full value of the policy without ANY tax liability, estate or otherwise within the Irrevocable Life Insurance Trust (ILIT).

Irrevocable Trusts can become very complex very quickly which is why you should always consult a knowledgeable New York estate lawyer before considering the formation of any type of trust. If you or a loved one is thinking about planning their estate, feel free to speak with an experienced NY estate planning lawyer at the Law Offices of Jason W. Stern & Associates at (718) 261-2444 for a free consultation.

1 comment
  1. Excellent ideas on why Irrevocable Life Insurance Trusts are important for wealthy people with larger estates who need life insurance too. It also is important to remember to have your trust created before the life insurance is purchased and drafted by a qualified estate planning attorney like Jason Stern. Since, many things need to be monitored with you policy, you should purchase a second-to-die life insurance from a reputable insurance company and qualified insurance agent. Best of luck in 2017.

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