Estate & Insurance Review

North Shore Asset Management & Tax Advisory – Estate & Insurance Review

This process involves the analysis of current estate plans. First, a discussion of objectives where assets are supposed to go, whether a client passes away before his spouse, or the spouse passes away before the other spouse. Who is to receive what, and who is to control the distribution? Most importantly, how the transfer of wealth to the next generation is supposed to work. This involves the use of wills and trusts. There are variable advantages and variable different types of trusts, but we can talk about those. I am not an attorney, but we have a network of attorneys for the purpose of the implementation drafting craftsmanship of the trust documents. These documents need to embody the goals that the clients have for the distribution of the estate and the avoidance of unnecessary taxation. Life insurance can be a key part of the estate planning process. Many estates are heavily composed of real estate, of business, of farm, things of that nature, and they’re worth considerable money. Liquidity from life insurance can be key in keeping these assets in the family and providing the necessary cash on an income tax-free basis to offset any state or federal inheritance tax liability. The estate plan is a function of what you want to have done with your life’s work, who is to receive the money, and when. Often times, we’ve heard this process described as a set of babysitting instructions, but you’re not coming home. There are various forms of strategies. There are variable strategies used to minimize the size of the taxable estate, gifting programs, and things of that nature, charitable bequests are sometimes used depending on the client’s goals.

Under the services of insurance review, we first must recognize that in general, life insurance risk charges have gone down because people are generally living longer. It’s possible in some cases to exchange old life insurance for new at a cost savings or perhaps keep consistent cost and get increased coverage. We would also look at long-term care insurance because that can be essential in the conservation of retirement assets and investments, should the need for long-term care arise. It is the most likely form of insurance to be held under claim, since an overwhelming majority of people will require some human assistance in their lifetimes for continuing the basic essentials of living, such as eating and bathing and getting dressed, things of that nature.

Beneficiary designations for life insurance need to change periodically. Sometimes, we get a divorce. Sometimes, we have a death in the family. Sometimes, other circumstances can change and beneficiaries oftentimes get overlooked in a review of the overall estate plan. In essence, the estate planning documents must reflect current wishes and objectives of clients as well as being coordinated with beneficiary designation on other assets. This would include real estate. If we have real estate, it would be appropriate to use a trust, usually revocable living trust, to hold these properties because such trusts avoid probate and if properties are owned in multiple states, this would, of course, help avoid multiple probate proceedings.

We have the capacity to review existing life insurance contracts. Some of these life insurance contracts are very good, and others may no longer be necessary. They are good resources though, and would need to be coordinated with the trust work that I mentioned earlier. The beneficiary designations are very, very important. In fact, the beneficiary designations of retirement accounts and bank accounts and brokerage accounts are important, as they must coordinate with the estate planning documents. Since these arrangements are all done by different people in a different time, it needs to be reviewed so that beneficiary designations are in line with your estate’s goals.

One of the major obstacles and issues that pertain to estate-planning is the federal estate tax. There is also, in most states, a state inheritance tax. The Federal estate tax has had several legal changes and is now an issue among people that are very wealthy. People that have millions of dollars, instead of hundreds of thousands of dollars. Ways to help minimize the size of the taxable estate include gifting, charitable planning, and the use of irrevocable trust. The use of trust in general can be complicated, but are generally intended to help avoid probate and provide the particular management that a client wants to accomplish. A very important decision, of course, is the decision of who shall be the successor trustees. Typically, a married couple will involve the choice of one spouse as trustee for the other, and vice versa. But after both spouses die, the decision becomes who then should manage the flow, distribution, and management of property for other beneficiaries, usually children and grandchildren? It’s also possible to control the size of the estate by how assets are owned. For example, life insurance proceeds are received income-tax free, but the ownership of life insurance can increase the size of the taxable estate. If you have a $1M life insurance policy and you’re the owner of it, it’s included in the valuation of your estate. States, using Illinois as an example, have a threshold of $4M. In other words, there’s a state estate tax, sometimes called a transfer tax, on estates in excess of $4M.

If a large component of the estate is a retirement plan, such as an IRA, or 401(k), or 403(b), or thrift savings plan if you’re a government employee, can be both taxable for estate tax purposes and certainly for income tax purposes. If the estate is large, many cases caused by the size of the retirement account, you can have full transfer taxes and income taxes. Which would serve to deeply diminish the size of the inheritance from this type of asset.

There’s also a gift tax. The gift tax is not a tax on property, it’s a tax on the privilege of transferring property. Gifting has been a traditionally good method of helping to minimize the taxable estate; but, depending on the size of the gift, there may be a tax imposed on that as well. Years ago, when there was not a gift tax, people when they were about to die, would give away their holdings before they die to avoid the estate tax. But the government figured this out, of course, and placed a tax on the amount of gifting. And the amount will vary based on the timing and the nature of the gift. Many families have established family partnerships to hold certain property.

There’s a deduction that’s important to know, and it’s called the marital deduction. Which means that you can leave as much property as you want to a spouse without the imposition of a gift or estate tax. We have to be careful of transfers to spouses who are not US citizens. Those roles vary, but they can impose a tax on the transfers to non-citizen spouses. This is something we occasionally encounter.