Showing posts with label estate. Show all posts
Showing posts with label estate. Show all posts

Friday, March 19, 2021

Do I Need To Put My Life Insurance Inside a Trust?

Since we are in the middle of tax season I have tried to keep this week's topics around insurance and taxes. The last one is a bit different but may be of use to some people.  

As the title of this post implies, we are going to take a quick look at trusts and why people use them for life insurance purposes. And like my previous posts, I am obligated to give my disclaimer that I am not a tax expert, so if you have more specific questions about the tax implications I recommend consulting a tax professional.

Why would anyone want to put life insurance inside of a trust, you ask? For several reasons, actually. For instance, there are those people who have special needs children and may be interested in funding their care as they become special needs adults. In that instance, we use a Special Needs Trust and a "second to die" life insurance policy to fund it when both parents pass away. 

However, for the purposes of this blog we will look at Irrevocable Life Insurance Trust (ILIT). When we (or our attorney) create a trust, it's basically like creating a whole new entity, like a new person. The purpose of using the trust for life insurance is for estate tax purposes. The life insurance policy inside the trust is no longer part of the estate, so it can't be taxed. 

The current federal estate tax exemption is $11,700,000, which is very high and adjusted for inflation each year. However, the amount is scheduled to drop to $5,000,000 on December 31, 2025. And now that the Democrats are in control of congress it may drop sooner. 

I realize that for many people these numbers may seem extremely high. At the same time, I know a business owner who purchased a piece of land many years ago and opened a small restaurant. The value of that property increased dramatically over years since he bought it, so his house and business are close to reaching that $5m threshold. When I discussed it with him, he was totally unaware.

Another thing to consider is that you can name a trustee, who may be a family member but can also be a friend or even your attorney. This trustee can use the policy proceeds (death benefit) for your beneficiaries without giving them full control of the monies. This is important if you have small children, a second marriage or if your beneficiaries can't manage the money on their own. 

My advice when it comes to these kinds of situations is to consult a good estate attorney who has experience in these matters. Just because an attorney can make a will does not necessarily mean they understand trusts. When the word "irrevocable" is in the name it means you can't change things later. As a good attorney friend of mine once said to me, "Get a lawyer who has done this before. You don't want one to practice on your client."

There are a few rules you need to be aware of. Some are:

  1. You can transfer existing policies into the trust but there is a three year lookback, so if you die in the first three years the death proceeds will be included in your estate and potentially taxed. 
  2. The estate is a separate entity and will need it's own tax identification number. Because of this, your premiums will need to be "gifted" to the trust. The trust will, in turn, pay the premiums to the insurance company.
Overall, a trust can be a great way to use life insurance to pay estate taxes. And as I stated earlier, it's best to consult an estate attorney and a tax professional if you have questions. In the meantime, please stay healthy!

Chris Castanes is the president of Surf Financial Brokers, helping people find affordable life and disability insurance coverage. He's also is a professional speaker helping sales people be more productive and efficient and has spoken to professional and civic organizations throughout the Southeast. And please subscribe to this blog! 

Monday, January 4, 2021

How To Make Life Insurance Work

Life insurance has come a long way since the days when it was known as burial insurance and used mainly to pay for funeral expenses. Today, life insurance is a crucial part of many estate plans. You can use it to leave much-needed income to your survivors, provide for your children’s education, pay off your mortgage, and simplify the transfer of assets. Life insurance can also be used to replace wealth lost due to the expenses and taxes that may follow your death, and to make gifts to charity at relatively little cost to you.

To illustrate how life insurance can help you plan your estate wisely, let’s compare what happened upon the death of two friends: Neil, who bought life insurance, and Bob, who did not. (Please note that these illustrations are hypothetical.)

Life insurance can protect your survivors financially by replacing your lost income

Neil bought life insurance to help ensure that his survivors wouldn’t suffer financially when he died. When Neil died and his paycheck stopped coming in, his family had enough money to maintain their lifestyle and live comfortably for years to come.

And since Neil’s life insurance proceeds were available very quickly, his family had cash to meet their short-term financial needs. Life insurance proceeds left to a named beneficiary don’t pass through the process of probate, so Neil’s family didn’t have to wait until his estate was settled to get the money they needed to pay bills.

But Bob didn’t buy life insurance, so his family wasn’t so lucky. Even though Bob left his assets to his family in his will, those assets couldn’t be distributed until after the probate of his estate was complete. Since probate typically takes six months or longer, Bob’s survivors had none of the financial flexibility that a life insurance policy would have provided in the difficult time following his death.

Life insurance can replace wealth that is lost due to expenses and taxes

Neil planned ahead and bought enough life insurance to cover the potential costs of settling his estate, including taxes, fees, and other debts that his estate would have to pay. By comparison, these expenses took a big bite out of Bob’s estate, which had to sell valuable assets to pay the taxes and expenses that arose as a result of his death.

Life insurance lets you give to charity, while your estate enjoys an estate tax deduction

Using life insurance, Neil was able to leave a substantial gift to his favorite charity. Since gifts to charity are estate tax deductible, this gift was not subject to estate taxes when he died. Bob always dreamed of leaving money to his alma mater, but his family couldn’t afford to give any money away when he died.

Life insurance won’t increase estate taxes — if you plan ahead

Before buying life insurance, Neil talked to his attorney about the potential tax consequences. Neil’s attorney told him that if his estate was large enough, it could be subject to federal and state estate taxes, depending on the applicable law at the time of his death. Neil and his attorney put a plan in place that would allow Neil’s survivors to use his life insurance policy to help pay for some of the potential estate taxes that might be owed at his death.

Be like Neil, not like Bob

Throughout his life, Bob worked hard to support his family. Neil did, too, but went one step further — he bought life insurance to protect his family after his death. Here’s how you can be like Neil:

  • 1. Use life insurance to ensure that your family has access to cash to help them meet both their short-term and long-term financial needs.
  • 2. Plan ahead — buy enough life insurance to cover the potential costs of settling your estate and to ensure that the assets you leave to your survivors aren’t less than you intended.
  • 3. Consider using life insurance to give to charity.
As you can see, these are just a few ways to make sure your life insurance policy is used efficiently. If you have any questions or comments, let us know. In the meantime, please stay healthy. 

Chris Castanes is the president of Surf Financial Brokers, helping people find affordable life and disability insurance coverage. He's also is a professional speaker helping sales people be more productive and efficient and has spoken to professional and civic organizations throughout the Southeast. And please subscribe to this blog!

Monday, November 30, 2020

4 Things You Should Take Care Of Before You Die

As they say, nothing is certain but death and taxes. And as your tax rate may be able to go up and down, there isn't much you can do about your death. But you can make it a lot easier for those you leave behind if you have your affairs in order ahead of time. Depending on your situation, you can take care of some or all of these items early on and it doesn't have to cost you a fortune. 

The basics of taking care of things before you go to your eternal reward are not too complicated. Ask yourself the following questions.  

  • Do I want a funeral? If so...
  • Do I want to my family to have to pay for my funeral?
  • Do I have any assets that need to be transferred at my death? For example, a home, business, collections, etc. 
  • Do I want anyone to be excluded from those assets?
In other words, do you want to make these decisions now or do you want your family to have to try to figure it all out after you are gone? 

Years ago my mother passed away. She had a small collection of jewelry that included a few rings and broaches. I discussed this with my father and suggested he distribute the jewelry as he wished while he was still alive to hear "thank you" from the recipients. But I had ulterior motives as well. I didn't want to be the one having to figure out which family members would get what.

My father never followed through. At his passing the jewelry just got distributed, and I'm pretty sure that some family members were overlooked while others received small items that were intended for others.

With this in mind, here's a short list of things you should take care of before you die.

  1. Buy life insurance*. Sounds obvious, but making sure your family can pay for your final expenses is very important. When you die, people will have their hands out asking for money, like the funeral director and the lawyer. The only one bringing you money will be the insurance agent. Make sure your beneficiaries are up-to-date and keep in mind that you can "assign" part of the proceeds to the funeral home.
  2. Pre-plan/Pre-pay for your funeral. My father went to the funeral home and picked out his casket in advance as well as other items on his "final wish list". He failed to pay for any of it, leaving my sister and I to front the money until we received the life insurance proceeds.
  3. Have a will. This keeps your estate from ending up in probate, which can be costly and puts your estate at the mercy of a judge. A will can alleviate any disagreements between family members as to who will receive proceeds and how much. For instance, if you own a business and one child actively works there while another child does not, you can put directives in the will that address the issue.
  4. Have a living will. Again, you can alleviate a lot of tension in the family by making decisions ahead of time when you are lucid.
Making sure that you have taken care of these kinds of issues in advance will keep your family on speaking terms (as much as possible) and avoid conflicts. 

Nowadays, people have extended families, businesses, investments and other obligations that are hard to untangle if someone were to die unexpectedly. Letting attorneys and courts make those decisions can be costly and unproductive. Make sure your intentions are known and your loved ones will remember you fondly. 

If you have questions or comments, please let us. In the meantime, stay healthy!

*Life insurance trumps a will since it is a legally binding contract. 

Chris Castanes is the president of Surf Financial Brokers, helping people find affordable life and disability insurance coverage. He's also is a professional speaker helping sales people be more productive and efficient and has spoken to professional and civic organizations throughout the Southeast. And please subscribe to this blog! Thanks!