Wills and Trusts

Estates, wills and trusts are legal concepts that you should be familiar with if you would like to ensure that your assets transfer to the right people after your death. An estate consists of any and all things of value that you own at the time of your death, and is subject to a 45 percent federal estate tax before it can be passed on to heirs. Who will inherit what is determined by your will, but you must make provisions to ensure that estate taxes are taken care of as well. This is one of the reasons that trusts exist.

When a person establishes a trust, it allows their estate to avoid the probate process by placing property under the control of a trustee to control until that property is set to be passed along to the heirs. This trust is not subject to estate taxes since it is now under the care of a trustee and can no longer be accessed by the person who established it.

If you have a large life insurance policy or are thinking of purchasing one, it may be a good idea to consider putting that policy into a life insurance trust. If your assets (including the policy) exceed $3.5 million dollars you risk paying a heavy estate tax. You can avoid this by creating an irrevocable life insurance trust, which will maintain the policy and distribute the payout upon your death. By placing money in the trust upon its creation to ensure that payments are made, you can avoid having the payments counted against your estate tax exemption.

The downside to irrevocable life insurance trusts is that you aren't able to borrow on the your life insurance policy or change the beneficiary of the policy. You also cannot transfer an existing policy to a trust unless you live for an additional three years after you announce your intent. In order to set up a trust you must find a trustee. Often your bank will provide this service or you can hire a trust company whose only job is to act as trustee for their clients. Hiring a trustee for an insurance trust is typically much less expensive than for a normal trust.