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Category: Life Insurance

It is important to talk to your children about your estate planning

Talk to Your Children about Your Estate Planning

It is important to talk to your children about your estate planning. Some $68 trillion will move between generations in the next two decades, reports U.S. News & World Report in the article “Discuss Your Estate Plan With Your Children.” Having this conversation with your adult children, especially if they are members of Generation X, could have a profound impact on the quality of your relationship and your legacy.

Staying on top of your estate plan and having candid discussions with your children will also have an impact on how much of your estate is consumed by estate taxes. The historically high federal exemptions are not going to last forever—even without any federal legislation, they sunset in 2025, which isn’t far away.

One of the purposes of your estate plan is to transfer money as you wish. What most people do is talk with an estate planning attorney to create an estate plan. They create trusts, naming their child as the trustee, or simple wills naming their child as the executor. Then, the parents drop the ball.

Talk with your children about the role of trustee and/or executor. Help them understand the responsibilities that these roles require and ask if they will be comfortable handling the decision making, as well as the money. Include the Power of Attorney role in your discussion.

What most parents refuse to discuss with their children is money, plain and simple. Children will be better equipped, if they know what financial institutions hold your accounts and are introduced to your estate planning attorney, CPA and financial advisor.

You might at some point forget about some investments, or the location of some accounts as you age. If your children have a working understanding of your finances, estate plan and your wishes, they will be able to get going and you will have spared them an estate scavenger hunt.

If possible, hold a family meeting with your advisors, so everyone is comfortable and up to speed.

Most adult children do not have the same experience with taxes as parents who have acquired wealth over their lifetimes. They may not understand the concepts of qualified and non-qualified accounts, step-up in cost basis, life insurance proceeds, or a probate asset versus a non-probate asset. It is critical that they understand how taxes impact estates and investments. By explaining things like tax-free distributions from a Roth IRA, for instance, you will increase the likelihood that your life savings aren’t battered by taxes.

Even if your adult children work in finance, do not assume they understand your investments, your tax-planning, or your estate. Even the smartest people make expensive mistakes, when handling family estates.

Having these discussions is another way to show your children that you care enough to set your own ego aside and are thinking about their future. It’s a way to connect not just about your money or your taxes, but about their futures. Knowing that you purchased a life insurance policy specifically to provide them with money for a home purchase, or to fund a grandchild’s college education, sends a clear message. So talk to your children about your estate planning. Don’t miss the opportunity to share that with them, while you are living.

If you would like to learn more about family communication and estate planning, please visit our previous posts. 

Reference: U.S. News & World Report (Feb. 17, 2021) “Discuss Your Estate Plan With Your Children”

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Should you sell your life insurance policy?

Should You Sell Your Life Insurance Policy?

It is quite common to buy life insurance. It may have been to protect your family financially or as a vehicle to provide liquidity for estate taxes. As we grow older and laws change, it is critical to determine if your policy has outlived its intended purpose. The traditional strategy of “buy and hold” no longer applies to the ever-changing world. Today, it may be a good idea to consider selling your policy. Should you sell your life insurance policy?

Forbes’ recent article entitled “What You Should Know Before Selling Your Old Life Insurance Policy” explains that a lesser-known alternative to abandoning or surrendering a policy is known as a life settlement. This gives the policy owners the chance to get a much bigger cash lump sum, than what is provided by the life insurance carrier’s cash surrender value.

Life settlements are not new. Third-party institutional buyers have now started to acquire ownership of policies, in exchange for paying the owner a lump sum of cash. As a consequence, the policy owner no longer needs to make future premium payments.

The policy buyer then owns the life insurance policy and takes on the responsibility of future premium payments. They also get the full death benefit payable from the life insurance carrier when the insured dies.

Research shows that, on average, the most successful life settlement deals are with policies where the insured is age 65 or older. Those who are younger than 65 usually require a health impairment to receive a life settlement offer.

Knowing what your life insurance policy is worth is important, and its value is based on two primary factors: (i) the future projected premiums of the policy; and (ii) the insured’s current health condition.

Many policy owners don’t have the required experience with technical life expectancies, actuarial tables and medical knowledge to properly evaluate their life settlement value policies. This knowledge gap makes for an imbalance, since inexperienced policy owners may try to negotiate against experienced and sophisticated policy buyers trying to acquire the policy at the lowest possible cost.

To address this imbalance, the policy owner should seek help from an experienced estate planning attorney to help them with the process to sell the policy for the highest possible price.

Should you sell your life insurance policy? If you have an old life insurance policy that’s collecting dust, ask an experienced estate planning attorney to review the policy’s importance and purpose in your portfolio. This may be the right time to turn that unneeded life insurance policy into cash.

If you would like to learn more about life insurance and its usage, please visit our previous posts.

Reference: Forbes (Jan. 26, 2021) “What You Should Know Before Selling Your Old Life Insurance Policy”

 

charitable contribution deductions from an estate

Don’t Fail to Fund Your Trust

Revocable trusts can be an effective way to avoid probate and provide for asset management, in case you become incapacitated. These revocable trusts — also known as “living” trusts — are very flexible and can achieve many other goals. A revocable trust is a great tool, but don’t fail to fund your trust.

Point Verda Recorder’s recent article entitled “Don’t forget to fund your revocable trust” explains that you cannot take advantage of what the trust has to offer, if you do not place assets in it. Failing to fund the trust means that your assets may be required to go through a costly probate proceeding or be distributed to unintended recipients. This mistake can ruin your entire estate plan.

Transferring assets to the trust—which can be anything like real estate, bank accounts, or investment accounts—requires you to retitle the assets in the name of the trust.

If you place bank and investment accounts into your trust, you need to retitle them with words similar to the following: “[your name and co-trustee’s name] as Trustees of [trust name] Revocable Trust created by agreement dated [date].” An experienced estate planning attorney should be consulted.

Depending on the institution, you might be able to change the name on an existing account. If not, you’ll need to create a new account in the name of the trust, and then transfer the funds. The financial institution will probably require a copy of the trust, or at least of the first page and the signature page, as well as the signatures of all the trustees.

Provided you’re serving as your own trustee or co-trustee, you can use your Social Security number for the trust. If you’re not a trustee, the trust will have to obtain a separate tax identification number and file a separate 1041 tax return each year. You will still be taxed on all of the income, and the trust will pay no separate tax.

If you’re placing real estate in a trust, ask an experienced estate planning attorney to make certain this is done correctly.

You should also consult with an attorney before placing life insurance or annuities into a revocable trust and talk with an experienced estate planning attorney, before naming the trust as the beneficiary of your IRAs or 401(k). This may impact your taxes. Remember, if you fail to fund your trust, your heirs may be in for a huge headache.

If you would like to learn more about funding a trust, please visit our previous posts. 

Reference: Point Verda Recorder (Nov. 19, 2020) “Don’t forget to fund your revocable trust”

 

charitable contribution deductions from an estate

A Life Settlement Might Be an Option

Even in this volatile environment, many seniors may have an option for more retirement income available in the sale of their life insurance policy. A life settlement might be an option. It could provide them with an average of four or more times the cash surrender value of their policy.

The Street’s recent article entitled “Is Your Life Insurance Policy Worth More Than Its Cash Surrender Value?” explains that anytime a senior isn’t going to keep a life insurance policy, they should look into a life settlement to bring them the most money when they terminate the policy.

When a policy is lapsed, the policy owner gets nothing. When a policy is surrendered back to the insurance company, the policyowner receives little, if any, cash surrender value. So, in instances where a policy is being lapsed or surrendered, a life settlement might be an option that makes financial sense.

According to 2019 life insurance industry data, over 90% of life insurance policies (by face amount) that terminated in 2018 were lapsed or surrendered. In 80% of those cases, the policyowners received nothing in return for years of premium payments to the insurance company, because they lapsed their policies.

Over the next decade, more than $2 trillion in life insurance policy death benefits that could qualify for a life settlement is anticipated to be lapsed or surrendered—about $850 billon is projected to be policies between $100,000 and $1 million.

So is a life settlement an option for you? To qualify for a life settlement, an individual must usually be at least 70 years old and own a whole life, universal life, or convertible term insurance life insurance policy, with a death benefit of $100,000 or more.

Traditionally, life settlements have been available only where the insured has developed a significant health impairment since the policy was started, but now even those insureds without a change in health can qualify for a life settlement, depending on their age and the type and size of the policy.

Some life settlement companies take several months to make an offer to purchase a policy, asking for full medical records and independent underwriting. However, recently, life settlement companies have shortened the time in evaluating a policy and making an offer. Depending on your age and health, a life settlement might be an option for you and your family.

If you are interested in learning more about how life insurance can play a role in your planning, please visit our previous posts. 

Reference: The Street (Dec. 22, 2020) “Is Your Life Insurance Policy Worth More Than Its Cash Surrender Value?”

 

charitable contribution deductions from an estate

Pay for Your Debts at Death

When you pass away, your assets become your estate, and the process of dividing up debt after your death is part of probate. Creditors only have a certain amount of time to make a claim against the estate (usually three months to nine months). So how do you pay for your debts at death?

Kiplinger’s recent article entitled “Debt After Death: What You Should Know” explains that beyond those basics, here are some situations where debts are forgiven after death, and some others where they still are required to be paid in some fashion:

  1. The beneficiaries’ money is partially protected if properly named. If you designated a beneficiary on an account — such as your life insurance policy and 401(k) — unsecured creditors typically can’t collect any money from those sources of funds. However, if beneficiaries weren’t determined before death, the funds would then go to the estate, which creditors tap.
  2. Credit card debt depends on what you signed. Most of the time, credit card debt doesn’t disappear when you die. The deceased’s estate will typically pay the credit card debt at death from the estate’s assets. Children won’t inherit the credit card debt, unless they’re a joint holder on the account. Likewise, a surviving spouse is responsible for their deceased spouse’s debt, if he or she is a joint borrower. Moreover, if you live in a community property state, you could be responsible for the credit card debt of a deceased spouse. This is not to be confused with being an authorized user on a credit card, which has different rules. Talk to an experienced estate planning attorney, if a creditor asks you to pay the credit card debt at death. Don’t just assume you’re liable, just because someone says you are.
  3. Federal student loan forgiveness. This applies both to federal loans taken out by parents on behalf of their children and loans taken out by the students themselves. If the borrower dies, federal student loans are forgiven. If the student passes away, the loan is discharged. However, for private student loans, there’s no law requiring lenders to cancel a loan, so ask the loan servicer.
  4. Passing a mortgage to heirs. If you leave a mortgage behind for your children, under federal law, lenders must let family members assume a mortgage when they inherit residential property. This law prevents heirs from having to qualify for the mortgage. The heirs aren’t required to keep the mortgage, so they can refinance or pay for your debt entirely. For married couples who are joint borrowers on a mortgage, the surviving spouse can take over the loan, refinance, or pay it off.
  5. Marriage issues. If your spouse passes, you’re legally required to pay any joint tax owed to the state and federal government. In community property states, the surviving spouse must pay off any debt your partner acquired while you were married. However, in other states, you may only be responsible for a select amount of debt, like medical bills.

You may want to purchase more life insurance to pay for your debts at death or pay off the debts while you’re alive. If you would like to learn more about debts and other vital issues to address when someone dies, please visit our previous posts. 

Reference: Kiplinger (Nov. 2, 2020) “Debt After Death: What You Should Know”

 

charitable contribution deductions from an estate

How Do I Keep Money in the Family?

That seems like an awfully large amount of money. You might think only the super wealthy need to worry about estate planning, but you’d be wrong to think planning is only necessary for the 1%. So how do I keep money in the family?

US News and World Report’s recent article entitled “5 Estate Planning Tips to Keep Your Money in the Family” reminds us that estate taxes may be only part of it. In many cases, there are income tax ramifications.

Your heirs may have to pay federal income taxes on retirement accounts. Some states also have their own estate taxes. You also want to make certain that your assets are transferred to the right people. Speaking with an experienced estate planning attorney is the best way to sort through complex issues surrounding estate planning. When trying to keep money in the family, here are some things you should cover:

Create a Will. This is a basic first step. However, 68% of Americans don’t take it. Many of those who don’t have a will (about a third) say it’s because they don’t have enough assets to make it worthwhile. This is not true. Without a will, your estate is governed by state law and will be divided in probate court. Ask an experienced estate planning attorney to help you draft a will.  You should also review it on a regular basis because laws and family situations can change.

Review Your Beneficiaries. Perhaps the simplest way to keep money in the family. There are specific types of accounts, like retirement funds and life insurance in which the owners designate the beneficiaries, rather than this asset passing via the will. The named beneficiaries will also supersede any directions for the accounts in your will. Like your will, review your account beneficiaries after any major life change.

Consider a Trust. Ask an experienced estate planning attorney about a trust for possible tax benefits and the ability to control when a beneficiary gets their money (after they graduate college or only for a first home, for example). If money is put in an irrevocable trust, the assets no longer belong to you. Instead, they belong to the trust. That money can’t be subject to estate taxes. In addition, a trust isn’t subject to probate, which keeps it private.

Convert to Roth’s. If you have a traditional 401(k) or IRA account, it will help keep money in the family, but it might unintentionally create a hefty tax bill for your heirs. When your children inherit an IRA, they inherit the income tax liability that goes with it. Regular income tax must be paid on distributions from all traditional retirement accounts. In the past, non-spousal heirs, such as children could “stretch” those distributions over their lifetime to reduce the total amount of taxes due. However, now the account must be completely liquidated within 10 years after the death of the owner. If the account balance is substantial, it could necessitate major distributions that may be taxed at a higher rate. To avoid leaving beneficiaries with a large tax bill, you can gradually convert traditional accounts to Roth accounts that have tax-free distributions. The amount converted will be taxable on your income taxes, so the objective is to limit each year’s conversion, so it doesn’t move you into a higher tax bracket.

Make Gifts While You’re Alive. A great way to make certain that your money stays in the family, is to just give it to your heirs while you’re alive. The IRS allows individuals to give up to $15,000 per person per year in gifts. If you’re concerned about your estate being taxable, these gifts can decrease its value, and the money is tax-free for recipients.

Charitable Donations. You can also reduce your estate value, by making charitable donations. Ask an experienced estate planning attorney about setting up a donor-advised fund, instead of making a one-time gift. This would give you an immediate tax deduction for money deposited in the fund and then let you make charitable grants over time. You could designate a child or grandchild as a successor in managing the fund.

Complicated strategies and a constantly changing tax code can make keeping money in the family feel intimidating. However, ignoring estate planning can be a costly mistake for your heirs. Talk to an estate planning attorney. If you would like to learn more about estate tax planning, please visit our previous posts.

Reference:  US News and World Report (Sep. 30, 2020) “5 Estate Planning Tips to Keep Your Money in the Family”

 

charitable contribution deductions from an estate

Your Estate Plan May Need an Audit

You should have an estate plan because every state has statutes that describe how your assets are managed, and who benefits if you don’t have a will. Most people want to have more say about who and how their assets are managed, so they draft estate planning documents that match their objectives. If you created an estate plan years – or even decades ago – your estate plan may need an audit.

Forbes’ recent article entitled “Auditing Your Estate Plan” says the first question is what are your estate planning objectives? Almost everyone wants to have financial security and the satisfaction of knowing how their assets will be properly managed. Therefore, these are often the most common objectives. However, some people also want to also promote the financial and personal growth of their families, provide for social and cultural objectives by giving to charity and other goals. To help you with deciding on your objectives and priorities, here are some of the most common objectives:

  • Making sure a surviving spouse or family is financially OK
  • Providing for others
  • Providing now for your children and later
  • Saving now on income taxes
  • Saving on estate and gift taxes in the future
  • Donating to charity
  • Having a trusted agency manage my assets, if I am incapacitated
  • Having money for my children’s education
  • Having retirement income; and
  • Shielding my assets from creditors.

Speak with an experienced estate planning attorney about the way in which you should handle your assets. If your plan doesn’t meet your objectives, your estate plan should be revised. This estate planning audit will include a review of your will, trusts, powers of attorney, healthcare proxies, beneficiary designation forms and real property titles.

Note that joint accounts, pay on death (POD) accounts, retirement accounts, life insurance policies, annuities and other assets will transfer to your heirs by the way you designate your beneficiaries on those accounts. Any assets in a trust won’t go through probate. “Irrevocable” trusts may protect assets from the claims of creditors and possibly long-term care costs, if properly drafted and funded.

Another question is what happens in the event you become mentally or physically incapacitated and who will see to your financial and medical affairs. Use a power of attorney to name a person to act as your agent in these situations.

If you have decided that your estate plan needs an audit and you find that your plans need to be revised, follow these steps:

  1. Work with an experienced estate planning attorney to create a plan based on your objectives
  2. Draft and execute a will and other estate planning documents customized to your plan
  3. Correctly title your assets and complete your beneficiary designations
  4. Create and fund trusts
  5. Draft and sign powers of attorney, in the event of your incapacity
  6. Draft and sign documents for ownership interest in businesses, intellectual property, artwork and real estate
  7. Discuss the consequences of implementing your plan with an experienced estate planning attorney; and
  8. Review your plan regularly.

To learn more about estate planning documents such as a trust or will, please visit our previous posts.

Reference: Forbes (Sep. 23, 2020) “Auditing Your Estate Plan”

 

charitable contribution deductions from an estate

Consider Funding a Trust with Life Insurance

You have set up a trust and now you need to fund it. There are many different options available. You might want to consider funding a trust with life insurance. How would funding a trust with life insurance work, and could it be a good option for you? A recent article in Forbes “How to Fund a Trust With Life Insurance” explains how this works. Let’s start with the basics: a trust is a legal entity where one party, the trustee, holds legal title to the assets owned by the trust, which is managed for the good of the beneficiary. There can be more than one person who benefits from the trust (beneficiaries) and there can be a co-trustee, but we’ll keep this simple.

Trusts are often funded with a life insurance policy. The proceeds of the policy provide the beneficiary with assets that are used after the death of the insured. This is especially important when the beneficiaries are minor children and the life insurance has been purchased by their parents. Placing the insurance policy within a trust offers more control over how funds are used.

What kind of a trust should you consider? All trusts are either revocable or irrevocable. There are pros and cons to both. Irrevocable trusts are better for tax purposes, as they are not included as part of your estate. However, with an $11.58 million federal exemption in 2020, most people don’t have to worry about federal estate taxes. With a revocable trust, you can make changes to the trust throughout your life, while with an irrevocable trust, only a trustee can make changes.

Note that, in addition to federal taxes, most states have estate taxes of their own, and a few have inheritance taxes. When working with an estate planning attorney, they’ll help you navigate the tax aspect as well as the distribution of assets.

Revocable trusts are the most commonly used trust in estate planning. Here’s why:

  • Revocable trusts avoid probate, which can be a costly and lengthy process. Assets left in the revocable trust pass directly to the heirs, far quicker than those left through the will.
  • Because they are revocable, the creator of the will can make changes to the trust as circumstances change. This flexibility and control make the revocable trust more attractive in estate planning.

If you want to consider funding a trust with life insurance, be sure the policy permits you to name beneficiaries, and be certain to name beneficiaries. Missing this step is a common and critical mistake. The beneficiary designations must be crystal clear. If there are two cousins who have the same name, there will need to be a clear distinction made as to who is the beneficiary. If someone changes their name, that change must be reflected by the beneficiary designation.

There are many other types of trusts, including testamentary trusts and special needs trusts. Your estate planning attorney will know which trust is best for your situation. Make sure to fund the trust and update beneficiary designations, so the trust will achieve your goals.

If you would like to learn more about funding a trust – and what happens if you don’t – please visit our previous posts. 

Reference: Forbes (Sep. 17, 2020) “How to Fund a Trust With Life Insurance”

 

charitable contribution deductions from an estate

Life Changes Mean Changes For Your Estate

Federal News Network’s recent article entitled “Divorced, kids grown, moving? Time for a pre-checkout checkup!” says life changes mean changes for your estate, like when your children grow up and leave the home.

Let’s review some of the key components of a complete estate plan.

A basic estate plan includes powers or attorney and some mechanism for distributing your assets, in the event of death.

If you become seriously ill or injured, perhaps even in a vegetative state, you should let your family and the hospital know if you want heroic measures to be taken to keep you alive.

An advance medical directive, also known as a health care power of attorney, is essential. This document addresses two important issues. It designates an individual that you select to make health care decisions for you, if you’re unable to make these decisions for yourself.

It also includes end of life instructions (called a living will) that details what actions you wish to have taken on your behalf if you are terminally ill, in a vegetative state and if you are unlikely to recover. For example, many living wills discuss whether to be kept alive by artificial means, such as with the use of a ventilator.

Another important tool in any estate plan is a general durable financial power of attorney. This lets your agent manage your financial affairs, if you’re incapable of managing them on your own.

When most people think of estate planning, they think about a will.

While a will is very important, most people have many assets that will not be impacted by their wills. This includes assets such as jointly owned property, and assets for which a beneficiary is designated, like life insurance, TSP and annuities.

The important point to know is that everyone needs to state exactly how they want to have their assets distributed following their death. This can be via a will, a trust, or by beneficiary designations. Many different events will shape your life and these changes mean you need to keep changing and updating your estate plan to keep up.

If you would like to learn more about estate planning and the different options available to you, please read our previous posts. 

Reference: Federal News Network (August 31, 2020) “Divorced, kids grown, moving? Time for a pre-checkout checkup!”

 

charitable contribution deductions from an estate

Can You Protect Your Estate with Life Insurance?

Can you protect your estate with life insurance? With proper planning, insurance money can pay expenses, such as estate tax and keep other assets intact, says FedWeek’s article entitled “The Role of Life Insurance in Estate Planning.”

The article provides the story of “Bill” as an example. He dies and leaves a large estate to his daughter Julia. There are significant estate taxes due. However, most of Bill’s assets are tied up in real estate and an IRA. Julia may not want to hurry into a forced sale of the real estate. If she taps the inherited IRA to raise cash, she’ll be forced to pay income tax on the withdrawal and lose a valuable opportunity for extended tax deferral.

A wise move for Bill would be to purchase life insurance on his own life. The policy’s proceeds could be used to pay the estate tax bill. Julia will then be able to keep the real estate, while taking only the Required Minimum Distributions (RMDs) from the inherited IRA. If Julia owns the insurance policy or it’s owned by a trust, the proceeds probably will not be included in Bill’s estate and won’t help with the estate tax obligation.

While you may be able to protect your estate with life insurance, there are a few common life insurance errors that can damage an estate plan:

Designating the estate as beneficiary. If you make this move, you put the policy proceeds in your estate, where the money will be exposed to estate tax and your creditors. Your executor will also have additional paperwork, if your estate is the beneficiary. Instead, be certain to name the appropriate people or charities.

Designating a single beneficiary. Name at least two “backup” or contingency beneficiaries. This will eliminate some confusion in the event the primary beneficiary should predecease you.

Placing your life insurance in the “file and forget” file. Be sure to review your policies at least once every three years. If the beneficiary is an ex-spouse or someone who has passed away, you need to make the appropriate change and get a confirmation, in writing, from your life insurance company.

Inadequate insurance. You may not have enough life insurance. If you have a young child, it may require hundreds of thousands of dollars to pay all of his or her expenses, such as college tuition and expenses, in the event of your untimely death. Skimping on insurance may hurt your surviving family. You also don’t need to be so thrifty, because today’s term insurance costs are very low.

To learn more about estate planning in general, please visit our previous posts here.

Reference: FedWeek (June 11, 2020) “The Role of Life Insurance in Estate Planning”