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Posts Tagged ‘estate planning’

Should I Put My Life Insurance in a Trust?

Posted on: April 30th, 2014 by Debra Rahmin Silberstein

As with many questions relating to estate planning, the answer is, “it depends.”

The first place to start is your assets. In Massachusetts, estates with assets over $1 million, including life insurance, are subject to the Massachusetts estate tax. In 2014, the federal estate tax exemption is effectively $5.34 million for an individual, and $10.68 million for a married couple (‘portability’ allows a surviving spouse to utilize any unused portion of the deceased spouse’s exemption). But that’s enough about estate tax. The crux of the matter is, if you have life insurance, and your estate is taxable (i.e. all your assets, including life insurance, combined are worth more than $1 million for Massachusetts residents), then you ought to be thinking about an Irrevocable Life Insurance Trust. If your estate is not taxable, skip the next section, but read on to find out about naming your revocable trust as beneficiary of your life insurance policies.

Irrevocable Life Insurance Trusts

The primary benefit of an irrevocable life insurance trust (“ILIT”) is that it removes the life insurance policies from your estate for estate tax purposes. While many people believe life insurance is “tax free,” this actually refers only to the proceeds received by the beneficiary. While your beneficiaries do not pay income tax on the proceeds of a life insurance policy, the value of a life insurance policy is still included in your “gross estate” for estate tax purposes. An ILIT allows you to remove the life insurance policies from your estate by permanently transferring them to an “irrevocable trust.” When you die, the ILIT’s Trustee simply files a claim with the insurance company, and the company writes a check payable to the Trust. The funds are then held in trust, or distributed outright to your beneficiaries.

While the administration of an ILIT is slightly more complicated than a revocable living trust – beneficiaries must receive annual notices providing the beneficiaries with a right to withdraw the premium payments (or a portion thereof), for example, and the life insurance premiums must be paid by the trustee – ILITs can result in significant estate tax savings for people with taxable estates and sizable life insurance policies, allowing you to leave more to your loved ones.

Naming Your Revocable Trust as Beneficiary of a Life Insurance Policy

If your estate is not in the taxable range, there is still a significant benefit to naming your revocable trust as the beneficiary of your life insurance, rather than naming individuals outright. Naming the trust will allow you maximum flexibility as to how you distribute the assets to your beneficiaries. If any beneficiary is a minor, or you would rather that they did not receive a large sum of money outright, your Trustee can hold the property for their benefit, making distributions only for their “health, education, maintenance, and support.” Or if a beneficiary receives needs-based government benefits, you can name a Supplemental Needs Trust as beneficiary, to prevent the funds from rendering the beneficiary ineligible. Alternatively you could hold the funds in trust until the beneficiary graduates college, has a steady job, or earns a certain amount of money, allowing you to pass on your values to your children. Holding life insurance proceeds in trust may also protect your beneficiaries’ inheritance against creditor claims, lawsuits, bankruptcy, and other unexpected life events that threaten assets held by your beneficiaries individually.

So while the nature of your life insurance planning will depend on the size of your estate, and how you want to distribute to your beneficiaries, the chances are that naming a trust as beneficiary of your life insurance, in some capacity, is the right choice for you.

2013 Estate Tax Portability for Remarried Surviving Spouses

Posted on: September 20th, 2013 by Debra Rahmin Silberstein

Federal Estate Tax Portability, made permanent by Congress in 2013 legislation, means that where a deceased spouse does not use his or her entire federal estate tax exemption – currently $5.25 million – the balance can be used by the surviving spouse. This is great news for tax efficiency, but without attention to the details of the law, certain people can lose out on the advantages of portability.2013 Estate Tax Portability

2013 Estate Tax Portability Rules Could Mean Potential Pitfalls for the Unwary

For example, suppose a husband dies and doesn’t use any of his $5.25 million amount (because he leaves everything to his wife, taking advantage of the unlimited marital deduction). When the wife dies, her exemption amount will be her own $5.25 million plus the $5.25 million that the husband didn’t use. The wife can therefore leave up to $10.5 million to whomever she wishes without paying any estate tax.

However, should the wife remarry, she can no longer take advantage of the inherited exemption amount if the new spouse dies first. Instead, she will inherit the exemption amount of the second spouse. As a result, if she marries someone with no exemption, for example, she’ll lose the $5.25 million she inherited from her former husband, and only be left with her own $5.25 million exemption.

Potential Planning Opportunities

There are opportunities to plan around such circumstances, however. If a widow who inherited a large exemption happened to marry someone with a much smaller exemption, there would be the opportunity to use up her large inherited exemption during her life by making substantial inter vivos gifts, thereby avoiding hefty estate taxes that may result if she waited until her new spouse’s death.

In Any Event, Filing an Estate Tax Return Is Crucial

Whether or not the spouse intends to remarry or not, filing a federal estate tax return  is required to ensure that the surviving spouse inherits any unused exemption. Therefore, to achieve maximum tax efficiency, an estate tax return should always be filed, even if no tax is due. Who knows – you might win the lottery!

For questions about estate tax portability, or any other estate planning matter, contact our Andover, Massachusetts Estate Planning Attorneys at the Law Office of Debra Rahmin Silberstein on (978) 474-4700