A trust is an entity by which one person, a trustee, legally holds title to some assets that should be administered for the beneficiary’s benefit. Most commonly, trusts are usually established with a Life Insurance Policy. Life policies are generally agreed upon so that the death benefit and the investment value of the policy will be evenly distributed. Usually, the policyholder dies first, and then the beneficiaries take over the investment value of the life insurance policy.
Civil partnerships are another common form of trust formation. A civil partnership is simply a transaction in which two parties enter into a partnership to become legally joined as husband and wife. A civil partnership begins the day one spouse becomes a resident of the United States and continues until the end of the life of either spouse. In addition to having their life insurance policy in which the investment is made, the trust will also have a separate bank account. The assets and other monies held in the trust are accumulated. Civil partnerships are often financed with a life insurance policy and sometimes are financed with a small estate in which the trust grows the investments and does not become liable for paying off the procedure.
In some situations an individual may establish a marital trust. Marital trusts can be financed with either a life insurance policy or a conventional savings account and can also be financed with an estate. The proceeds of the estate are exempt from taxation until distribution unless the trust has already been destroyed in some other way. Once the estate is destroyed, proceeds from the estate are exempt from taxation unless the trust itself is destroyed.
Some people use a life insurance policy or a trust to hold the estate and pay the tax proceeds upon the death of the beneficiary. These funds can then be distributed to the beneficiaries with or without additional taxes being paid by the estate. However, there are circumstances where it may not be possible to distribute the proceeds from the estate in this manner. In these instances, the trust would need to provide for funding the dependents of the decedent’s estate.
Separate trusts may also be established for the purpose of providing funding for the probate of a decedent’s estate. In such cases, separate legal representatives are appointed to act as agents for the trust and to divide the proceeds amongst the beneficiaries of the estate upon the death of the decedent. An irrevocable life insurance policy can be used in these situations.
Revocable living trusts may also be established to provide for distribution of the estate following the decedent’s death. Revocable trusts are created by executing and recording a power of attorney for the decedent. This gives the legal representative of the trust the power to decide how the trust should be liquidated upon the decedent’s death. A power of attorney for trust also allows a beneficiary of the trust to request funds in the event that they become incapacitated, unable to obtain the requested funds, or unable to obtain the necessary approval for distribution from another individual or entity.
Upon death of a beneficiary of a life insurance trust, the decedent’s beneficiaries are entitled to receive the entirety of the decedent’s life insurance policy proceeds. If the proceeds from the policy are less than the premiums, the excess is generally split between the remaining beneficiaries. It is important that the proceeds from the life insurance trust be distributed in a timely manner to avoid the possibility of dissipation. Usually, at least five years must elapse before the proceeds can be distributed. There are times when the proceeds from a life insurance trust can be distributed sooner.
When a person is making an estate plan, they must document all of the specifics including a trust. The tax consequences of having a trust include the fact that it makes the transfer of property more complicated and requires the review of tax laws, the application process of estate planning, and the reporting requirements of the Internal Revenue Service. The grantor must always remember that their trust does not convey any right or obligation to the beneficiaries. The grantor must disclose in their estate plan any details regarding the trust such as who is the person acting as the trustee. The grantee is responsible to pay taxes on the gift they make to the charity.