How to Claim and Use Life Insurance

Many people have life insurance, and they have it for a multitude of reasons.  These include funeral costs, liquidity in an estate, help paying off taxes and so on.  Whatever your reason for having it, I wanted to talk about how to make a claim on it, and separately, what to do with it once you have.  You can see more at Kiplinger’s recent article entitled “What Is the Best Way for a Widow to Use Life Insurance Proceeds?”

When making a claim, you’ll need a couple of things.  First and foremost, perhaps blindly obvious, is that your beneficiaries need to know you have it.  If an insurance company becomes aware of a death they might reach out to named beneficiaries, but that is a big assumption.  So, your life insurance beneficiaries or whoever may claim the insurance needs to know it exists.

Holding that aside, the person entitled to the money will start by contacting the insurance company.  The company will send or direct that person on where to download a form to claim the insurance.  Beneficiaries typically need to provide proof of who they are, a death certificate for the insured (which in most places is issued within a few weeks of death) and other information about how to pay the insurance.  For example, some companies ask if you want to turn it into an investment fund at their financial institution, others arrange how to cut the check and so on.

It is worth noting that your executor or trustee won’t have the right to do this unless the estate or the trust is the beneficiary of the life insurance.  All told, the process typically takes something like 30 days.

Now, what to do with the insurance proceeds varies based upon the purpose and need of the life insurance.  I’m also going to assume for now that the insurance isn’t being paid to a trust which is designed to hold assets long term such as a descendant’s trusts.  That might have different concerns.

So, with that said, here are some ideas on how to use the life insurance.

Funeral Costs. Use life insurance money to cover these costs to decrease your financial strain.  Most funeral companies actually have you purchase a small insurance policy in order to prepay a funeral.

Ongoing Expenses. This is especially true when one spouse dies, but living expenses do not stop. Your income is frequently reduced. In fact, after the death of a spouse, household income generally declines by about 40% due to changes in Social Security benefits, spouse’s retirement income and earnings. The death benefit from a life insurance policy can help provide the funds you need to help cover your mortgage, car payment, utilities, food, clothing and health care premiums.

Debts. You are generally not personally responsible for paying off the debts of the decedent. However, when an estate does not have enough funds to pay all the debts, any gifts that were supposed to be paid out to beneficiaries will most likely be reduced. Note that you may be responsible for certain types of debt, such as debt that is jointly owned or a loan that you have co-signed. Talk to an experienced estate attorney to understand the laws of your state, so that you know where you stand concerning all debts.  By way of example, you have very few responsibilities to pay a decedent’s debts in Texas.

Taxes.  As a tie-in to debts, some people use life insurance to give an influx of liquidity to pay estate taxes.  This often helps when an estate is large due to real estate or businesses or other illiquid assets.  The IRS of course wants the tax paid in cash, so life insurance gives you the cash to do so without liquidating other assets.

Create an Emergency Fund. Life insurance can help build a liquid emergency fund, which should cover three to six months of expenses.

Supplement Your Retirement. When one spouse passes, the survivor becomes much more economically vulnerable. To retire, a person typically needs 80% of their preretirement income to live comfortably.  So, insurance provides and extra supplement to cover that need.

Reference: Kiplinger (Dec. 17, 2021) “What Is the Best Way for a Widow to Use Life Insurance Proceeds?”

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What You Shouldn’t Put in your Will

We often talk about different estate planning vehicles, such as use of trusts versus a will, and frequently about what types of provisions and powers should be including in your estate plan.  Today, I’m going to change that.  Let’s talk about what you shouldn’t put in your will, or at least, not without a lot of thought and care.  A recent article from Best Life titled “Never Include These 2 Things in Your Will, Experts Warn.” was the inspiration, but I had some different ideas.

As a quick point, I’m examining specifically what you shouldn’t have in a will.  Most of this would be applicable to trusts as well, with some caveats.

  1. Conditional gift in your will.

One thing you shouldn’t put in your will is a conditional gift.  A conditional gift is when money or property is given only when and if a specific event takes place. For instance, grandpa might leave a conditional gift for his grandchild, if she graduates college, gets a job, or gets married. These provisions are often drafted in the hopes of encouraging or discouraging certain behaviors and have a tendency to get messy.

Even the seemingly basic condition of graduating from college can turn into a major issue, if the beneficiary decides to pursue a trade or accelerates in college and is offered an excellent job before earning her degree.  Not all programs are the same, and some colleges have 5 year undergraduate programs that tie into professional services.   The cost of obtaining the inheritance may not be worth it.

Similar obstacles—and, frequently, creative workarounds from beneficiaries who want to unlock their inheritance—will also be encountered with other conditional gifts. However, there are still ways to achieve the spirit of the conditional gift without it getting complicated. Instead, give the bequest outright without any conditions but include the encouragement that the beneficiary does something specific.

Another option is to hold the gift in a trust for a beneficiary. With a trust you can designate a trustee to be in control of the assets in the trust after your death. The trustee will have discretion as to the timing and amount of distributions. You can also detail how narrow or broad that discretion should be, perhaps detailing that you hope it will be for college education.

See here for more ideas on that front:  https://www.galliganmanning.com/how-grandparents-can-help-pay-for-college/ 

  1. Be careful with dollar amount bequests.

The article suggests that you should never include a specific dollar bequest.  I disagree that clients should never include specific dollar bequests, but I have encountered many, many estates where they are problematic, so I’m going to address it.

Specific dollar bequests often create disparate giving compared to the rest of the estate.  What I mean by this is that when you come up with the estate plan, perhaps you had $500,000 and a house, and for an easy (but not very realistic) example, let’s assume that it is all cash in a bank account.  You leave $20,000 to each of your grandkids and you had 4 at the time you prepared the plan.  As you expected it, you were giving $80,000 out of your $500,000 cash, and the rest goes to your kids (so, $420,000 for them).

Fast forward to the time the person passed.  After a long-term care stay, unfavorable stock market, enjoying their retirement and the birth of 3 more grandkids, they now are at $250,000.  So, $140,000 will go to grandkids, and $110,000 goes to the kids.  Based upon where we started, the testator likely didn’t want the grandkids to get so much more than their kids.

Even further, and this is a more common problem, is that people who use wills often have non-probate assets as part of their estate plan.  When they formulate their plan, they are thinking of the whole value of their estates, regardless of whether the will controls them or not.

So, going back to my prior example, let’s assume the $500,000 cash is actually $300,000 in IRA, $150,000 in investments for which there is a transfer on death beneficiary at the suggestion of the banker and $50,000 in cash in a bank account.  After the person dies, regardless of whether they have more grandkids or not, only the $50,000 is part of their estate plan as the IRA and investment account pay directly to their beneficiaries.  The executor doesn’t control them.  So, how does the executor pay out the $20,000 per grandkid?  Maybe sell the house?

A better option in many cases is to use percentages. In this way, your estate will self-correct for size and each beneficiary will get their proper share.  One caveat is that I disfavor that with charitable beneficiaries, but that’s its own article.

  1. Burial Provisions

There are some states where this is still relevant, but in most places you shouldn’t put burial provisions in your wills.  It’s true that it used to be that way, but over time lawyers identified a common problem.  Wills might have been left with the drafting attorney, or in a safety deposit box, or generally not found until after the person passed and was buried.  If the will said “I want to be cremated,” it was kind of too late.

Instead, many states, including Texas, provide for individuals to name a person to execute your final wishes and to include what those wishes are.  These are called appointments for the disposition of remains, and work very well as standalone documents you can share with your agents for when the time comes.

  1. Listing Property

This isn’t a problem so much as it is unnecessary or potentially confusing, but wills shouldn’t list what you own.  I typically see this in handwritten or DIY wills, but there is no reason to list what you own. In fact, it is better not to as the will is designed to work as a catch-all.  It is supposed to control and direct any of your assets remaining at death unless a contract already directs them, such as non-probate assets like retirement accounts and insurance which pass by contract.

It may also cause confusion, because if you miss something or if you list values and the values change, an executor or beneficiary might think the will only applies to that property, as opposed to everything else.  So, no need to list property or limit it in any way.

Every will is specific to the person who creates it. In order to ensure that yours is done properly, meet with an experienced estate planning attorney to create a will that benefits you and your loved ones—without any unexpected problems.

Reference: Best Life (March 20, 2022) “Never Include These 2 Things in Your Will, Experts Warn”

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What are the Duties of an Executor?

Many clients struggle with who can serve as an executor for their estate plan.  They may not have an easy option amongst their family, and are hesitant to ask others to serve as executor.  Many times clients want to know what are the duties of an executor so they can convey that to a potential candidate for the role.  It isn’t easy to explain everything an executor needs to do as they have to react to the circumstances as the time, but there are some general steps they will address.  A recent US News article entitled “How to Prepare to Be an Executor of an Estate” takes a further look into what is expected of an executor.

First, keep in mind that an executor is the person who helps wrap up the finances, assets and affairs for a deceased person. An executor is a person named in a will, and that is the scenario I’ll address.  If you are using trusts, many of the steps will overlap.

As executor of an estate, you will need to get copies of the death certificate and the will, and take both to an attorney well versed in probate law.  That attorney can help you probate the will through court.

Once appointed, you will follow the instructions in the will to administer the estate.  As executor, you are acting in a fiduciary capacity, and your efforts are directed toward the interests of the beneficiaries of the decedent’s the estate.

You will identify the assets of the estate, determine their value, pay off any valid debts, close accounts like utilities and cable or phone plans and distribute money and possessions to beneficiaries.  Depending on the terms of the will and the situation, you’ll have to file tax returns, make tax elections, and potentially sell property and the like.  You may also establish trusts for beneficiaries, or make arrangements to deliver assets such as personal property, real property, vehicles and more.

The duties of an executor also include reporting what assets they found in the estate through the filing of an inventory, to notify creditors or other essential parties.  Attorneys help with this process to ensure compliance with state laws.

The time required to be an executor can be extensive.  Any court process is not a fast one, and for that reason many clients choose to avoid it through the use of trusts in their plans.  Trusts do not require a court process and can be far more immediate for the family.  As I said before, the duties of an executor overlap with the trustee, so the issues for consideration when picking a trustee are similar.   You can see this article for more detail on the differences.  https://www.galliganmanning.com/the-difference-between-an-executor-a-trustee-and-other-fiduciaries/ 

Finally, executors may be compensated for their work. Some states have commission schedules listed in their statutes that the executor can collect, while other states require that you keep track of your time and the judge will authorize “reasonable” compensation for your actual efforts.

Ask for help if tasks seem overwhelming or you do not understand certain instructions on accounts or the will. An experienced estate planning attorney can assist.

Reference: US News (Dec. 22, 2021) “How to Prepare to Be an Executor of an Estate”

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