Although we do not sell life insurance here at Samuel, Sayward & Baler LLC, we do help clients plan for their families’ future and life insurance is often a part of that planning.  Here are five things to consider in the context of your estate plan when thinking about purchasing, or dropping, a life insurance policy.  

1. 1. Life insurance is an excellent planning tool for young families.  Young couples just starting life together often do not have a lot of assets.  They are at the beginning of their careers so their earnings are not at their peak.   In addition, they may carry significant student loan debt or a large mortgage.  The birth of a child is often the event that motivates them to purchase life insurance so that if one of them passes away, the survivor will have sufficient funds to stay in the house and raise the children. Considerations such as the impact the loss of one spouse’s income will have on the ability to pay the bills and educate the children should be analyzed when determining whether and how much life insurance to purchase.

   2. Life insurance is taxable in the insured’s estate (often).  Many people are confused about the taxability of life insurance.  In most cases, life insurance proceeds are not taxable income to the person who receives them.  For example, if my aunt names me as the beneficiary of her $100,000 life insurance policy, that $100,000 is not taxable income to me.  However, life insurance proceeds are a taxable asset of the insured’s estate if the insured owned the policy or had the right to cancel, surrender, or assign the policy or change the policy’s beneficiary.  As such, although I will not pay income tax on the $100,000 of life insurance proceeds my aunt left me, those proceeds will be included in my aunt’s taxable estate and will increase the estate tax liability if my aunt’s estate is large enough to require the payment of federal or state estate tax.

   3. Life insurance can be an easy way to solve a hard problem.  Life insurance can be a good way to address a situation that is creating stress in planning.  For example, spouses in a second marriage who want to leave pre-marriage assets to children from a prior marriage but also want to take care of their spouse, could purchase life insurance payable to the surviving spouse while benefitting children with the pre-marital assets. Business owners who want to make sure their surviving partners have the capital to continue to run the business may purchase life insurance on each other or through the business.  Parents who want to keep a beloved vacation home in the family but realize the expense of maintaining the property will be a burden to their children can use life insurance to provide funds to pay the costs of maintaining the home following their deaths.  Families with a special needs child who want to ensure that funds are available for the child’s lifetime to provide for housing or other needs may use life insurance to fund a trust for the child.

   4. Life insurance can be a Good Way to Pay Estate Taxes.  For those who have a taxable estate (i.e., more than $11.7 million federally in 2021 and $1 million in Massachusetts), life insurance can be a good way to provide liquidity to pay that tax which is due 9 months after death.  However, if the life insurance policy is owned by the deceased, then the life insurance proceeds are added to the taxable estate thereby increasing the estate tax liability.   Purchasing and owning life insurance in an Irrevocable Trust will prevent the life insurance proceeds from being part of the insured’s taxable estate thereby preserving the full value of the insurance for the family.  With speculation that Congress may reduce the estate tax exemption amount to $3.5 million and increase the rate of the federal estate tax, the irrevocable life insurance trust may become a more frequently used planning tool.

   5. Review your life insurance on a regular basis.     Life insurance is not an asset that should be purchased and then never looked at again.  As time goes by, needs change and life insurance purchased 10 years ago may no longer be sufficient or may no longer be needed.  So-called ‘term’ life insurance means that the premiums for the policy are fixed during the term but the policy will expire or the premiums will increase significantly when the term ends.  Term policies can be an excellent way to address a short-term situation such as providing funds for children’s education or paying off the mortgage.  Once the children have graduated from college or the mortgage is paid, the purpose for which the insurance was purchased is no longer important.  If the intention is that the insurance proceeds be available to support that vacation home you are leaving to your children or fund a trust for a special needs child, then a policy that will expire is probably not the right choice. 

In my experience, life insurance is typically more complicated than it seems at first blush.  It is advisable to work with an experienced life insurance agent, a financial planner, and an estate planning attorney to ensure that you purchase and retain insurance that meets your goals and is best suited for your needs, and own it in a way (in your name or in an Irrevocable Trust) that works with the rest of your estate plan.  If you have questions about how life insurance fits into your estate planning, please don’t hesitate to contact us to schedule a consultation with one of our attorneys. 

Attorney Suzanne R. Sayward is a partner with the Dedham law firm of Samuel, Sayward & Baler LLC which focuses on advising its clients in the areas of estate planning, estate settlement and elder law matters. She is certified as an Elder Law Attorney by the National Elder Law Foundation, a private organization whose standards for certification are not regulated by the Commonwealth of Massachusetts.  This article is not intended to provide legal advice or create or imply an attorney-client relationship. No information contained herein is a substitute for a personal consultation with an attorney. For more information visit our website at ssbllc.com or call 781/461-1020.

September, 2021

© 2021 Samuel, Sayward & Baler LLC

 

Life insurance companies are giving away free Apple Watches to people who share fitness data with them and meet their fitness goals.  New York state is allowing life insurance companies to scroll through your pictures on Instagram to determine your premiums.  The digital age has makes it possible to decrease premiums by installing fitness apps and posting pictures of yourself running. When thinking about life insurance as your family grows or your term life insurance expires, you will want to keep the following five things in mind as you consider the implications of life insurance on your estate plan.

1. What is life insurance? Life insurance provides a payout after your death (called a death benefit) to the people you designate as beneficiaries. It is an important safety net if anyone depends on you financially. Life insurance benefits can pay debts such as mortgages, replace your income and provide funds to pay college tuition. Life insurance can provide for dependents such as children or a younger spouse.  It can help a business owner buy out the interest of a deceased business partner.

2. Is group life insurance enough? Free life insurance at work is a great benefit. You sign up, and your employer pays.  More Americans are covered by work-based life insurance than by policies they purchase outside work. Most people rarely revisit their life insurance needs. Free coverage is typically one to two times your annual salary. However, you may want to replace more than two years of income upon your death.  Our firm does not advise clients as to the amount of insurance to obtain, but we work with financial advisors to make sure that ownership and beneficiary designations for insurance policies are in line with your estate plan.  If you have questions about your life insurance, speak with a financial advisor as to whether work coverage is sufficient depending on your goals to align with your estate planning needs.

3. Are your life insurance policies taxable? This is an important question to ask when preparing an estate plan. Beneficiaries do not have to pay income tax on death benefits they receive. However, proceeds of insurance policies are subject to estate tax upon your death if you control the policy – that is, if you can cancel, surrender, or assign the policy or change the policy’s beneficiary.  When life insurance proceeds are payable to your spouse, a marital deduction will apply.  However, if the proceeds are payable to children or others, an estate tax may be due.  As an example, if my sister designates me as beneficiary of a policy with a $50,000 death benefit, I will not pay income tax on the proceeds, but the $50,000 proceeds will be included in my sister’s estate for purposes of calculating the estate tax payable by her estate at her death. It is important to consider.

4. What can you do to avoid estate tax on life insurance? Life insurance proceeds can escape estate tax if you transfer the policy to an irrevocable life insurance trust.  Once the trust owns the policy, you cannot get it back or make changes to the provisions of the trust that will specify how the death benefit will be distributed at your death.  Also, you cannot be the Trustee of an Irrevocable Trust that owns a policy insuring your life. If you transfer an irrevocable policy to a trust but die within three years of the transfer, you lose the estate tax break, but if you create an irrevocable trust and the trust buys a new policy, the three-year rule does not apply.

5. What is the catch? The irrevocable trust as the policy owner must pay premiums. You cannot pay premiums directly but may make gifts to the trust.  The Trustee must give the beneficiaries notice of their right to withdraw amounts contributed to the trust so they qualify as present gifts.  These notices, called Crummey notices, are named after a court case that fleshed out these requirements and allow the contributions to qualify for the annual gift tax exclusion, relieving you of the need to file gift tax returns.

If you have purchased a life insurance policy or are contemplating purchasing a policy and would like to structure ownership to decrease the estate tax owed at your death, contact an estate planning attorney with experience in drafting and administering irrevocable life insurance trusts.

Samuel, Sayward & Baler LLC, a law firm that is based in Dedham.  The firm focuses on advising clients in the areas of estate planning, administration of estates and trusts and elder law.  For more information, visit www.ssbllc.com or call (781) 461-1020. This article is not intended to provide legal advice or create or imply an attorney-client relationship. No information contained herein is a substitute for a personal consultation with an attorney.

April 2019

© 2019 Samuel, Sayward & Baler LLC