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Entries in life insurance (6)

Thursday
Apr202017

Accidental Disinheritance: Update Wills, Estate Plans Annually

Gift Tax, Trusts & Estate Planning Attorney

by Kira S. Masteller
818.907.3244

 

So you have an estate plan? Good for you. You funded it? Even better. But have you updated it and your will in the last year? If you haven’t, your loved ones or favorite charities may be in for an unpleasant surprise. Your ex-spouses, step-children, ex-partners or someone else you hadn’t considered may find themselves receiving a windfall.

Designate Beneficiaries AnnuallyDon’t subject your loved ones to accidental disinheritance. This commonly happens when clients fail to update their beneficiary list, particularly upon:

  • Divorce
  • Remarriage
  • Death of a Beneficiary
  • Birth of a Child

Divorce is one of the more common events to cause rancor (and potential litigation) among surviving family members when a decedent hasn’t updated designations.

In Hillman v. Maretta for example, the Supreme Court of the United States decided Judy Maretta, the ex-wife of Warren Hillman, was entitled to Hillman’s nearly $125K life insurance policy proceeds. Hillman and Maretta were divorced for a decade before Hillman passed – but he never updated his policy beneficiary designee. His widow and ex-spouse battled in court for five years before the Supreme Court ultimately decided the case.

There’s more to this story however, as Hillman lived in Virginia which has laws to protect subsequent spouses (California Probate Code §6122, also protects subsequent spouses). Under state law, Hillman’s widow/current spouse would have received the proceeds.

But since Hillman was a federal employee, his life insurance policy was governed by the Employees’ Group Life Insurance Act of 1954. Under this Act, the beneficiary designation prevailed over Virginia regulations.

Similarly, consider Egelhoff v. Egelhoff. In this case, David Egelhoff named his wife Donna Rae as beneficiary of his pension plan and life insurance policy – both of which were governed by the Employment Retirement Income Security Act of 1974 (ERISA).

Shortly after their divorce, David died in a car accident. David’s children challenged Donna Rae’s status as beneficiary, citing Washington state law which would have revoked benefits for her upon divorce. The trial court found for the children, but an appellate decision found for the ex-spouse, and was upheld by the Supreme Court.

Laws in many states will revoke an ex-spouse’s claims. However, we see that federal laws will often trump state regulations. Even when no federal legislation applies, it just doesn’t make sense to make your preferred beneficiaries fight for their inheritances in court, should some question arise as to your intentions. Why put them through the expense and aggravation?

Beneficiary Designation Gone Bad

Here’s one more scenario that isn’t clouded by laws governing federal employees – in other words, this could happen to anyone:

We are currently dealing with a situation in which a wife was insured under two separate life insurance policies, and then passed away. Her husband was the designated beneficiary for both policies. Unfortunately, he became very ill just before his wife passed.

When she did pass, the husband was unable to manage his financial affairs, and never collected the life insurance proceeds due to him when his spouse died.

Death benefits from both life insurance policies are now going through probate (of the husband’s estate) before being distributed to the surviving children. If the parents’ living trust had been named as the beneficiary of the policies, the Trustee could have collected the life insurance benefits either when the husband was alive or after his death, without a Probate proceeding. 

Getting sound advice regarding how to complete beneficiary designations is AS IMPORTANT as completing them.

To be clear regarding your estate planning objectives, ensure these assets’ designations are all up to date:

  • Bank & Brokerage Accounts – Trust

  • Life Insurance Policies – Designate Trust or Tax Planning Life Insurance Trust

  • Trusts – check who you named as beneficiaries and who you appointed as trustees each year

  • Retirement Accounts – Beneficiary designation form

  • Company Benefit Plans - Beneficiary designation form

  • 529 College Accounts - Beneficiary designation form

  • Transfer on Death Accounts - Beneficiary designation form 

Kira S. Masteller is a Shareholder in our Trusts & Estate Planning Practice Group. 

Disclaimer:
This Blog/Web Site is made available by the lawyer or law firm publisher for educational purposes only, to provide general information and a general understanding of the law, not to provide specific legal advice. By using this blog site you understand there is no attorney client relationship between you and the Blog/Web Site publisher. The Blog/Web Site should not be used as a substitute for obtaining legal advice from a licensed professional attorney in your state.

Thursday
May072015

Benefits of an Irrevocable Life Insurance Trust as Security for Support

 

by Kira S. Masteller and Anthony D. Storm

 

Divorce or separation agreements often require one spouse to maintain life insurance as security for their support obligation. Attorneys often do not address the tax implications if the insured spouse owns the policy. 

Often life insurance will create an estate tax that would NOT otherwise exist by adding a windfall to the insured’s estate upon death. The death benefit of a life insurance policy owned by the insured spouse will be included in his or her estate for estate tax purposes. When the insured owns his or her life insurance policy, he or she has “incidents of ownership”, such as withdrawing cash value, assigning the cash value as collateral, or changing the beneficiary during his or her lifetime. 

In order to keep the death benefit OUT of the insured’s estate for estate tax purposes, the insured can create an Irrevocable Life Insurance Trust, commonly referred to as an ILIT.

Once created, the Trustee of the ILIT will own the life insurance policy, NOT the insured. As a result of having the ILIT own the policy, the insured avoids incidents of ownership and the tax implications associated therewith. 

The ILIT will also be the beneficiary of the life insurance policy resulting with the death benefit being held for the ex-spouse, children or other beneficiaries until certain ages, and can provide liquidity to an insured’s taxable estate, without having the death benefit itself be exposed to estate tax.  

Should the insured pass away before a support obligation is complete, the death benefit related to the support for the benefit of the ex-spouse would be administered by the Trustee of the ILIT pursuant to the terms of the Marital Settlement Agreement/Judgment. The residue of the death benefit, if any, would pass to the other named beneficiaries via the ILIT with no Court proceeding. 

Kira S. Masteller is a Trusts & Estate Planning Attorney. Contact her via email: kmasteller@lewitthackman.com, or by phone: 818.907.3244.

Anthony D. Storm is a Family Law Attorney. He can be reached via email: astorm@lewitthackman.com, or by phone: 818.907.3248.

 

Disclaimer:
This Blog/Web Site is made available by the lawyer or law firm publisher for educational purposes only, to provide general information and a general understanding of the law, not to provide specific legal advice. By using this blog site you understand there is no attorney client relationship between you and the Blog/Web Site publisher. The Blog/Web Site should not be used as a substitute for obtaining legal advice from a licensed professional attorney in your state.

Monday
Jul082013

Tony Soprano's Run In With the Tax Man

 

by Robert A. Hull

 

Many of us who were fans of the HBO show about a fictional New Jersey mafia family, The Sopranos, and actor James Gandolfini in particular (who played mob boss Tony Soprano), were shocked and saddened to learn of the actor's untimely death.  

Now, the media reports that substantial taxes will be due on Mr. Gandolfini's estate due to poor estate planning. Could some of these taxes have been avoided or, at the very least, delayed with different estate planning strategies?  

Based on the latest information about his estate, it is very likely. While many of the specifics are unclear, it appears Mr. Gandolfini could have benefitted from using estate planning strategies to leave more of his assets to his family.

As one example, if the $7 million life insurance payout to James' son was not held in a life insurance trust, the full value of this payout would be included in the value of his estate for taxation purposes. If such insurance were held in a life insurance trust, then this payout would not be included in his taxable estate, and could result in savings of several millions of dollars in estate tax.

Also, Mr. Gandolfini could have potentially reduced the size of his estate subject to estate taxes also by using revocable and irrevocable trusts, perhaps creating certain business entities and employing gifting strategies. But, without additional specific information about his assets, it is difficult to tell which combination would have been most effective.

Though the value of most of our estates does not approach Mr. Gandolfini's, estimated at over $70 million, we all have an interest in maximizing the assets which are ultimately distributed to our beneficiaries and minimizing those to the Tax Man.

The government's take from Mr. Gandolfini's estate will likely be over $30 million, and that's a lotta "scharole".

Disclaimer:
This Blog/Web Site is made available by the lawyer or law firm publisher for educational purposes only, to provide general information and a general understanding of the law, not to provide specific legal advice. By using this blog site you understand there is no attorney client relationship between you and the Blog/Web Site publisher. The Blog/Web Site should not be used as a substitute for obtaining legal advice from a licensed professional attorney in your state.
Wednesday
Jun192013

Designated Beneficiary Assets: Consider Your Income, Capital Gains & Estate Taxes

Trusts & Estate Planning Attorney

by Kira S. Masteller
818.907.3244

 

In the third segment of our series regarding Gift Tax & Estate Planning, we'll examine assets that require designated beneficiaries, specifically: IRA accounts, retirement accounts, life insurance, accidental death insurance, annuities and payable on death accounts, which pass outside of a probate or a living trust.

Designated beneficiary assets must be looked at individually because different types of assets require different designations depending on their income tax consequences.

For example, a life insurance policy does not suffer any negative income tax consequences when being distributed upon the death of the insured – although it is exposed to estate tax consequences. Because of this, your revocable living trust can be named as the primary beneficiary of a life insurance policy.

There are important advantages to naming the trust as the primary beneficiary: 

1. If you are married and have a trust that splits into two or more trusts upon the first spouse’s death for death tax planning purposes, the insurance proceeds can be utilized in the allocation of assets between the two trusts so that none of the decedent’s estate tax exemption is wasted.

If a surviving spouse is named as the primary beneficiary of the life insurance, the proceeds of the policy are not in the trust for allocation purposes and some or all of the decedent’s estate tax credit could be wasted.

2. If you have minor children and you name them as the direct beneficiaries of the life insurance policy, the proceeds will be subject to a Guardianship proceeding (court supervised) and held in an FDIC insured account (ensuring the account is held in an insured banking institution), which will be distributed to a child upon attaining age 18. This limits the asset’s growth possibilities, the ability for an adult to use those assets for that child during that child’s lifetime, and it gives a windfall to a child at age 18 when they may not be mature enough to manage money or get assistance managing money.

Remember: If minor children are direct beneficiaries of any asset, there will be a Court Guardianship proceeding which is expensive and time consuming. 

It is better to name your trust as the beneficiary of life insurance for children so that the problems discussed here, do not occur. You may consider using a life insurance trust for the same reasons mentioned above, as well as for estate tax planning purposes – the life insurance trust will keep the proceeds of the death benefit out of your taxable estate upon your death.

If you have any questions about who to designate as a beneficiary for your assets, please contact me for help.

In my next blog, we'll look into Retirement Assets, some of their potential problems and solutions to those problems. If you'd like to catch up on previous posts in this Gift Tax and Estate Planning series, click on the embedded links above to read about Living Trusts and Life Insurance.

Kira S. Masteller is a Gift Tax and Estate Planning Attorney and a Shareholder at our Firm. Contact her via email: kmasteller@lewitthackman.com for more information.

 

Disclaimer:
This Blog/Web Site is made available by the lawyer or law firm publisher for educational purposes only, to provide general information and a general understanding of the law, not to provide specific legal advice. By using this blog site you understand there is no attorney client relationship between you and the Blog/Web Site publisher. The Blog/Web Site should not be used as a substitute for obtaining legal advice from a licensed professional attorney in your state.

Wednesday
Jun052013

Using Life Insurance and Irrevocable Trusts in Estate Planning

Trusts & Estate Planning Attorney

by Kira S. Masteller
818.907.3244

 

Continuing with Part 2 of our Gift Tax and Estate Planning blog series (we discussed Living Trusts in Part 1 of the series), we now turn to life insurance – one more helpful tool in accomplishing your goals – if used in conjunction with an irrevocable life insurance trust.

Many people own life insurance so that their family will have sufficient capital to replace their income for a specific period of time. Others own life insurance to enable a business partner to buy out the family's interests in a jointly owned company upon their death. Still others have life insurance specifically to pay estate taxes. 

However, a problem arises if you own your life insurance policy. The death benefit of your life insurance will be included in your estate for estate tax purposes if you are the designated Owner. You might not have a taxable estate with your home, savings and retirement, but when you add your $1,000,000 death benefit to your estate, your tax situation changes. 

You can avoid including life insurance in your taxable estate by using an irrevocable life insurance trust. An irrevocable trust can be set up specifically to own your life insurance and receive the death benefit. 

You cannot be the Trustee of the trust, but you can appoint a trusted family member, friend, or professional Trustee who will own the life insurance on your life as Trustee, pay the premiums annually (which you will gift to the Trust each year), and who will ultimately file a claim upon your death and receive the insurance proceeds available for your family, or to pay estate tax as you plan. 

The use of a life insurance trust can determine whether or not you have a taxable estate, as well as provide liquidity to an estate that is already taxable. It is an inexpensive tool available to anyone who is going to purchase life insurance or who already has life insurance. 

There are specific Internal Revenue Code rules that must be followed with respect to a life insurance trust, but they are well worth the cost and effort when you are saving up to 40 percent in estate taxes on the life insurance proceeds. Contact me if you have any questions regarding how best to maximize your tax savings.

In the next installment of this series, I'll be blogging about Designated Beneficiary Assets, specifically, income tax, capital gains tax and estate tax.

Kira S. Masteller is a Gift Tax & Estate Planning Attorney in our Trusts and Estate Planning Practice Group. Email her at kmasteller@lewitthackman.com for more information.

Disclaimer:
This Blog/Web Site is made available by the lawyer or law firm publisher for educational purposes only, to provide general information and a general understanding of the law, not to provide specific legal advice. By using this blog site you understand there is no attorney client relationship between you and the Blog/Web Site publisher. The Blog/Web Site should not be used as a substitute for obtaining legal advice from a licensed professional attorney in your state.

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