Benefits of Life Insurance in Estate Planning

I’ve had a lot of conversations recently with clients about life insurance in their estate plans.  As an estate planner, I like life insurance.  It provides many benefits in estate planning that are worth considering.  So, I wanted to address some benefits of life insurance.

I’m not doing to talk about whether you should get it per se (other advisors are better suited for that and we can recommend excellent ones), and I’m not going to talk about the financial pros and cons, but instead will focus on the role of life insurance in an estate plan and administration.  For more on how insurance works and the pros and cons, you may want to read Bankrate’s recent article entitled “Life insurance for parents” which exams how life insurance can help your family.

Liquidity:Sometimes clients will ask for very detailed estate plans involving several bequests.  The estate plan is truly their legacy, and they want to express their love and appreciation to many people by giving them a gift in their estate planning.  I think that’s wonderful, but it does present a problem if the estate is illiquid.

For example, a client may have a very healthy estate of $3,500,000 and want to leave $100,000 a piece to 7 different relatives.  That’s fine in theory, but where do you get $700,000 in cash?  That client might have a house, a vacation/beach home, retirement and minimal bank accounts.  The 401(k) might have to (or tax wise should) go to his spouse.  If the house is worth $750,000, the beach home $250,000 and the retirement $2,000,000, you don’t have enough cash left over to give $700,000 to the family, unless you start selling.  With life insurance, you have the cash available.

Estate Tax Planning.This is a bit more complicated, but for clients concerned about estate tax, life insurance is a very useful tool.

The first reason why is similar to the liquidity point.  If you know you are going to pay the estate tax, which is a 40% tax rate on the value of the estate which exceeds your exemption, you may have a rather large check to write.  So, having cash at death provides your beneficiaries with a way to pay the tax without having to liquidate assets at death.

Second, it has a low lifetime value, and most of the value comes post death.  So, if you want to leave more money to your beneficiaries while keeping a smaller amount of assets during your lifetime, you may consider using life insurance in an irrevocable trust.  Here is a useful article talking about how life insurance trusts work.

https://www.galliganmanning.com/the-irrevocable-life-insurance-trust-why-should-you-have-one/

Providing for Beneficiaries with Disabilities: Life insurance is a great income replacement tool, which the Bankrate’s article addresses.  In this particular estate planning context, it is an extremely useful tool for planning for beneficiaries with disabilities.  For example, many couples who have a child with disabilities will provide for that child for as long as they are able.  Their lifetime support provides benefits, both tangible and intangible, for their child that government benefits can’t address.  However, that support may go away when you pass.

Now, that situation is often best addressed by leaving assets to that child in a supplement needs trust, but more importantly, the assets you leave have to be liquid as you know they will be used liberally for the care of your loved one.  So, creating a trust to hold the insurance, such as an inexpensive second-to-die policy, allows the cash to be held in a tax and benefits-efficient manner for your loved one.

Simplicity.Life insurance, in its simplest form, is a contract for a company to give cash to a person you named when you die.  That money is income tax free and doesn’t have complicated rules about how to distribute the proceeds.  For comparison, retirement assets like IRA’s and other qualified retirement funds have complicated rules about to whom they pay out, how long those beneficiaries have to take the money and very specific steps to follow to obtain them.  Retirement assets are wonderful of course because tax deferral allows retirement assets to grow tremendously and provide for your retirement, but are taxed to beneficiaries and don’t flow through your estate plan as easily as life insurance proceeds.

Creditor ProtectionThis is not true everywhere, but in Texas life insurance has creditor protection.  So, there are situations where an estate or a beneficiary has creditors, but life insurance can be shielded.  You don’t want to rely on that alone for asset protection planning, but is a helpful feature that cash in a bank account lacks.

If you have life insurance and want to discuss its role in your estate plan, please reach out to your estate planning attorney to learn how it can help you.

Reference: Bankrate (July 26, 2022) “Life insurance for parents”

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Benefits of Pre-Planning Your Funeral

Yahoo Life’s recent article entitled “Should You Pre-Pay for Your Own Funeral as Part of Estate Planning?” says there are major benefits to pre-planning and even pre-paying for a funeral now—no matter what your age or health status.

Many professionals would agree that pre-paying your funeral has valuable benefits for people.  A major benefit to pre-planning and pre-paying is the emotional support and relief they offer family members and friends.

Maggie McMillan, vice president of the Los Angeles-based Wiefels Group and All Caring Solutions Cremation and Funeral Services, explains that “if and when the unexpected happens, you want everyone to already know what your wishes are, because that will make it easier when hard emotions inevitably come up after you are gone.”

Knowing that your family is prepared and taken care of with prepayment can also help alleviate your own stress and better your mental health.

Anecdotally, I noticed over the years that some clients are very interested in this process.  It is the main reason they call us for an estate plan.  For clients like this, it is a way to give a final expression of their creativity or a positive farewell to their loved ones.

Another plus of pre-paying  your funeral is that, depending on what method of pre-payment you get, you can often lock in a price guarantee on services and merchandise based on current pricing on the day that you plan. This can protect your family from industry inflation and price fluctuation.  Funeral costs double every decade, on average. Therefore, if you’re looking at pre-paying for a service that costs $3,000 today but didn’t pre-pay and pass away 10 years later, your fees might be upwards of $6,000 for the exact same service.  Many clients tell me they are electing cremation solely to avoid the costs of funerals.

For some people, aspects of pre-planning and paying may not seem the right option.

For instance, a plan that isn’t transferable to different states doesn’t make sense for individuals who move around frequently. In that case, talking to loved ones about what your final wishes are (including where you’d like to end up, and the disposition method) would be a relief for them, in case the unthinkable happens.

For others, they may strategically put off pre-paying a funeral so that it is available as a Medicaid spend down technique.  In other words, don’t spend money on it until they have to.

In all cases, if you pre-plan and/or pre-pay your funeral, make sure you reflect that in your Appointment for the Disposition of Remains.  The Appointment is a legal document in which you name a person to execute your final wishes and can include those instructions.  It is an often overlooked, but sometimes very critical, estate planning document.

If you are interested in learning more on how to pre-plan your funeral or other final wishes, see this article.  https://www.galliganmanning.com/funeral-planning-not-a-festive-thought-but-a-kind-one/

Reference: Yahoo Life (Feb. 17, 2022) “Should You Pre-Pay for Your Own Funeral as Part of Estate Planning?”

 

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What If You Don’t have a Will?

Studies suggest that a majority of adults do not have an estate plan of any kind, even a will.  The issue of what happens when a person doesn’t have a will comes up frequently in our practice.  The answer to the question, which is what I’ll discuss here, provide lots of reasons to have one.  You can see a recent article entitled “Placing the puzzle pieces of long-term care and planning a will” from the Pittsburgh Post-Gazette for a bit more background, although state processes vary.

First, a will is a written document stating wishes and directions for dealing with the property you own after your death, also known as your “estate.” When someone dies without a will, property is distributed according to their state’s intestacy laws.  Intestacy sets who your beneficiaries will be since you haven’t chosen them, and generally are next of kin (with some wrinkles). If your next of kin is someone you loathe, or even just dislike, they may become an heir, whether you or the rest of your family likes it or not. If you are part of an unmarried couple, your partner has no legal rights, unless you’ve created a will and an estate plan to provide for them.

Intestacy rules vary greatly from state to state, especially in a community property state like Texas.  In general, intestacy laws distribute property to a surviving spouse or certain descendants. A very common exception, which many people don’t know and are surprised to learn, is that if you have children from outside of the current marriage, not everything goes to that spouse.  I frequently encounter families who assume spouse gets everything, regardless of family makeup, and this often leads to conflicts with family.

While practicing in Pennsylvania I actually had a situation in which one spouse died young without children and with living parents.  Not everything goes to the spouse in that situation, but instead, partially to spouse and the rest would have been divided between the surviving spouse and parents.  The surviving spouse was not pleased to learn that.

This may also lead to a difficult result for the beneficiary.  If they have disabilities and are using government benefits, receiving the inheritance may cause them to lose those benefits, which may be critical for that person’s care.  Wills and other estate planning documents can prevent that outcome.

If you don’t have a will, at least in Texas, it may be necessary to have a proceeding to determine who the heirs even are.  This is called an heirship proceeding and can be quite expensive as the court appoints another attorney (who you pay) to look for unknown heirs.  This whole process also adds time and uncertainty to a process which is already difficult due to the loss of a loved one.

Additionally, a will designates a person to handle the estate, often called an executor, and typically names successors should the first named person be unable or unwilling to serve.  In the absence of these directions, the heirs will have to figure it out among themselves, hopefully amicably and without litigation.

Many states also have limited proceedings that may or may not be helpful when a person doesn’t have a will.  For example, Texas has affidavits of heirship which can address retitling of land interests, such as the residence.  However, that won’t help for bank accounts.  Pennsylvania actually has a rule permitting small bank accounts to be distributed to next of kin after the funeral is paid.  That too may help, unless the account is $10,000 and is useless for land.  Many states have small estate proceedings that can work, but in practice are often cumbersome.

A much better solution: speak with an experienced estate planning attorney to have a will and other estate planning documents prepared to protect yourself and those you love.

Start by determining your goals and speaking with family members. You may be surprised to learn an adult child doesn’t need or want what you want to leave them. If you have a vacation home you want to leave to the next generation, ask to see if they want it. It may reveal new information about your family and change how you distribute your estate. A grandchild who has already picked out a Ferrari, for instance, might make you consider setting up a trust with distributions over time, so they can’t blow their inheritance in one purchase.

Determining who will be your executor is another important decision for your will. They are a fiduciary, with a legal obligation to put the estate’s interest above their own. They need to be able to manage money, make sound decisions and equally important, stick to your wishes, even when your surviving loved ones have other opinions about “what you would have wanted.”  See this article for further ideas:  https://www.galliganmanning.com/what-are-the-duties-of-an-executor/  

If there is no one suitable or willing, your estate planning attorney will have some suggestions. Depending on the size of the estate, a bank or trust company may be able to serve as executor.

The will is just the first step. An estate plan includes planning for incapacity. With a Will, a Power of Attorney, Medical Powers of Attorney and other documents appropriate for your state, you and your loved ones will be better positioned to address the inevitable events of life.

Reference: Pittsburgh Post-Gazette (April 24, 2022) “Placing the puzzle pieces of long-term care and planning a will”

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