Estate Strategies To Consider
In 2021, the federal estate tax exclusion increased to $11.7 million per person or $23.4 million for a married couple that takes advantage of portability. This historically high exclusion amount has people questioning whether they still need an ILIT if their estate is valued below this exclusion. However, it’s important to keep in mind that the federal estate tax exclusions are not permanent. If the laws are changed and the estate tax exclusions are lowered, the estate tax need for an ILIT could return. In addition, there may be a lower state estate tax exclusion amount in your state. As a result, your estate could have a state estate tax liability but not a federal estate tax liability.
Uses Of Life Insurance In Estate Planning
Life insurance can be used for many functions in estate planning.
Choosing Insurance To Help Provide Flexibility To The Executor Or Trustees
For the life insurance within the ILIT, either term life insurance or a form of permanent insurance, including whole life or universal life can be used. Many insureds choose permanent life, in part because the primary purpose of the ILIT is to transfer wealth to their heirs, which will only happen if the policy is still in force at the time of their death. If the insured outlives the term of the policy, the ILIT is essentially worthless.
Many insurance companies won’t issue a term policy past a certain age, and most term policies do not extend beyond age 80. A universal or whole life policy, on the other hand, can provide coverage for a fixed annual cost for life while providing a guaranteed death benefit.
Most ILITs are funded through the purchase of a new policy rather than through the gift of an existing policy. If an existing policy is gifted to the ILIT, the insured must survive for 3 years after the gift before the assets will be excluded from the insured’s estate for estate tax purposes. In comparison, if funded through the purchase of a new policy, proceeds of the policy will not be subject to estate taxes in the insured’s estate, even if the insured dies immediately after the ILIT’s purchase.
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The Value Of Your Estate For Federal Estate Taxes Vs Probate
Consider life insurance. You buy a $500,000 policy on your life, naming your daughter the beneficiary. Assuming you own the policy, when you die the entire $500,000 death benefit will be included in your gross estate for purposes of the federal estate tax. If your estate is big enough , the entire death benefit over that exemption is subject to a 40% federal estate tax.
The Bottom Line About Ilit
ILITs can help with wealth management and estate planning. However, they may not be the best option for everyone. Keep in mind that the trust agreement under an ILIT is irrevocable. That means you can no longer change the terms once they are in effect. If you think the terms may cause problems in the future, consider alternative options, such as choosing an entity to be the owner of the life insurance policy, giving a policy as a gift to ensure that it is out of your estate or making your child the insurance policy owner.
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What Debts Are Forgiven At Death
What Types of Debt Can Be Discharged Upon Death?
- Secured Debt. If the deceased died with a mortgage on her home, whoever winds up with the house is responsible for the debt. …
- Unsecured Debt. Any unsecured debt, such as a credit card, has to be paid only if there are enough assets in the estate. …
- Student Loans. …
Can An Estate Trustee Receive A Deceased’s Life Insurance Policy
While an estate trustee has no relationship to the life insurance policy, and therefore is not required to deal with any matters regarding the insurance company or the proceeds, an estate trustee can receive a deceaseds life insurance policy if they are named as a) the beneficiary, both as a legal and beneficial owner, or b) as a trustee of the funds on behalf of a minor beneficiary.
The estate trustee has no right to make any changes to the policy after the policyowners death. The only person who can legally make changes is the policyowner themselves, prior to their death. After their death, the contract is frozen and solidified.
We at CBM Lawyers are proud to offer our clients a wide range of legal services that include the handling of wills, estates, and trusts.
If you have an issue with how an estate is being administered, or how assets are being distributed, or you believe an estate trustee is attempting to receive a deceaseds life insurance proceeds, you may wish to find out, contact , or read more about our Estate Litigation services.
Contact us today to speak more about what this means for you and your family.
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Ownership Of The Policy
An insurance policy is a contract between the owner of the policy and the insurance company. The terms of the contract provide that the insurance company will pay a death benefit to a beneficiary designated by the owner in exchange for the payment of premiums. Payment of death benefits is made as of the date of death of the insured.
Where You Live Matters
In figuring out what you mean by in my estate, you not only need to define the term, but also identify where you call home or, legally speaking, where you are domiciled. For example, there are nine community property states . Assets in these states are treated differently for estate tax purposes than property owned by married couples who live in common law jurisdictions. Similarly, in most states, real estate held on a fee simple basis is transferred at death through the probate estate. However, in some states an alternative exists to use a transfer-on-death deed. This is akin to a TOD bank account where you can leave your account directly to another upon your death.
All of this legal speak makes a difference, because if property is in your probate estate you may be looking at expenses typically anywhere from 2% to 6%, whereas when the asset is out of the probate estate, no probate costs attach.
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Naming A Trust As Your Life Insurance Beneficiary
Ensuring your beneficiaries are well taken care of is a challenge. You want to guarantee they receive what they need and help them make the most of their future benefit. That requires you to minimize the eventual taxes on anything you pass down.
One solution people use to lessen the tax burden on your life insurance payout is to name a trust as the primary beneficiary. In particular, they use an irrevocable trust. Irrevocable trusts are trusts you, the grantor, cannot change. Only beneficiaries can approve or make changes once you create the trust. Naming an irrevocable trust as the beneficiary allows you to put your money away without paying taxes on it. After, the designated beneficiary of the trust can take out the funds.
While this means your beneficiary does not directly receive the money, it preserves the amount. This way, the funds dont experience the bite of estate taxes. But this is at a cost. You cannot touch, amend or borrow from the policy once you transfer it to the trust.
Alternatively, you can use a revocable, or changeable, trust. These provide a little more flexibility, which may be helpful if your circumstances change. And they help loved ones skip the process. However, you still technically own assets in a revocable trust, making them part of your estate. So, a revocable trust does not allow you or your beneficiaries to avoid estate taxes. This may not be an issue for smaller estates that dont qualify for the estate tax, though.
If A Decedent Failed To Complete A Beneficiary Designation Form
The same rules apply if the decedent failed to complete a beneficiary designation form before their death. Either the insurance proceeds will pass into the decedent’s probate estate and be available for paying the decedent’s final bills, or the proceeds will pass directly to their heirs-at-law, safe from creditors.
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Using Life Insurance Trusts To Avoid Taxation
A second way to remove life insurance proceeds from your taxable estate is to create an irrevocable life insurance trust . To complete an ownership transfer, you cannot be the trustee of the trust and you may not retain any rights to revoke the trust. In this case, the policy is held in trust and you will no longer be considered the owner. Therefore, the proceeds are not included as part of your estate.
Why choose trust ownership rather than transferring ownership to another person? One reason might be that you still wish to maintain some legal control over the policy. Or perhaps you are afraid that an individual owner may fail to pay premiums, whereas in the trust you can ensure that all premiums are paid promptly.
If the beneficiaries of the proceeds are minor children from a previous marriage, an ILIT will allow you to name a trusted family member as trustee to handle the money for the children under the terms of the trust document.
Why Own Life Insurance In A Trust
If you own a life insurance policy, you probably know that the beneficiaries youve named to receive the insurance proceeds when you pass away get that money income tax-free.
However, payout on a life insurance policy may not be exempt from estate tax, which is why planners often recommend that a trust own your life insurance policy instead of you owning it.
If youre married and you name your spouse as the beneficiary of a life insurance policy that you own, theres no estate tax on the insurance proceeds when you pass away because the payment to your spouse qualifies for the unlimited marital deduction from estate tax.
When your spouse eventually passes away, however, any of the proceeds that are still in your spouses name are subject to estate tax. An insurance trust can be an easy way to shelter the insurance proceeds from eventual estate taxes and prevent those proceeds from pushing your spouses estate value over the estate tax exemption threshold. And if you arent married, or if you and your spouse have a policy that only pays out on the death of the second spouse to die , having a trust as the policy owner can protect the insurance proceeds from estate tax on the death of your survivor. And dont think only of the federal estate tax if you live in one of the states that has a separate, state-level estate tax, you may want to consider an insurance trust even if your net worth doesnt exceed the federal threshold.
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Using Life Insurance In Estate Planning
Generally, life insurance plays three main purposes in estate planning. First, it provides death benefits to chosen beneficiaries. Second, it provides liquidity that can be helpful with an estate. Lastly, it allows loved ones to obtain financial support. That said, there are various strategies to maximize the benefits that life insurance offers when it comes to estate planning.
Navigate Your Options With Sim
Combining life insurance coverage and the last will is a great way to secure assets. Those who are looking for the best combination to secure their assets can get professional help from Sim. She has a unique professional background, working with financial planning and life insurance.
She can help you navigate your options and find the perfect fit to secure your assets and your loved ones without having to pay hefty fees or taxes. Schedule a call and see what Sim can do for you.
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Are Life Insurance Proceeds Protected From Creditors
Life insurance benefits paid to a beneficiary generally cannot be taken by creditors. This is to ensure families can use the proceeds to help with the financial burden of losing a loved one. If the benefits are paid to an estate, they may be subject to creditors. Another exception is when the beneficiary owes money. Creditors may be able to claim that money from the beneficiary depending on the regulations where they live.
If you’re trying to set up protections for your loved ones with life insurance and other estate planning, it may be a good idea to speak to a lawyer experienced in these matters. Estates can become complex and the laws are specific to each state.
When Someone Else Owns The Policy
Benefits would be paid to the child upon the parent’s death if the child took out the life insurance policy, or to any beneficiary the child designated. None of the death benefit would be be included in the parents estate and subject to estate tax in this case, because the decedent didn’t own the policy.
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Does A Life Insurance Payout Go Through Probate
A life insurance payout can be a significant financial resource for families already dealing with a difficult time but does it have to go through probate first?
Maybe. Whether or not a life insurance policy payout passes through probate depends on a number of factors such as whether or not the policy has any named beneficiaries, whether or not these people are alive, and whether or not the policyholder intended the payout to afford debts owed by their estate.
If your life insurance policys beneficiaries are still alive upon your death, the policys payout is not considered part of your estate and will not be probated. Instead, the payout will go directly toward your living beneficiaries.
How To Keep Life Insurance Out Of Your Estate
- Category: Life Insurance
- Posted: 7-Jan-2021
When an individual passes away, the life insurance policy is usually paid by the issuing company to the family through the beneficiary that has been chosen by the policy owner. In this article, we will answer an important question that most individuals research when deciding on an insurance policy and how it will affect their families when they die. As part of an estate, life insurance is essential information needed to properly plan for your familys future when you are gone.
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Is Life Insurance Part Of An Estate After Death
This scenario is quite popular today as it still foresees that the original owner preserves specific legal control over the policy. Moreover, in this case, it is possible to name a trusted family member as trustee to handle the money if you wish to name minor children from a previous marriage or any other minor relatives as beneficiaries of the policy.
How To Deploy It Effectively
Taking out a large life insurance policy can also add to the value of your estate, potentially diminishing the benefit of purchasing the policy in the first place. However, if you name an irrevocable trust as the beneficiary of your policies, the proceeds generally can be excluded from your estate and therefore be exempt from federal estate taxes. In addition, it provides immediate liquidity for your heirs to cover any outstanding estate fees or necessary expenses.
Two popular types of irrevocable trusts are often funded by life insurance:
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Understanding Estate Planning Challenges
Its vital to learn how to recognize estate planning challenges. To prevent incurring losses and ensure that you are getting the best available option for you and your heirs, pay attention to family members with disabilities, blended families, family-owned businesses and spouses.
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Family Members with a Disability
Estate planning can help you take care of your surviving loved ones after you pass away. For some, that means choosing which assets to give to whom. However, there may be cases when a certain family member requires more care. Finding the best legal tools can be difficult. If you have children with disabilities, consider the following resources: