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, 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.

Estate planning is the process of deciding on how to transfer properties from owners to beneficiaries at a minimum of taxes and expenses. They should also include a concern for privacy since some assets get transferred to others in a public setting. A court supervised arrangement that controls the distribution of property to other family members or other people. Many people die without having an estate plan. They die without leaving a will or without accomplishing complete planning. Many people just don’t take the time or are intimidated by the planning process itself. Let’s face it, it’s not our favorite subject. Most attorneys don’t handle estate planning, wills and trusts in the like. We do work with estate planning attorneys at NorthShore Asset Management and Tax Advisory even though we are not ourselves attorneys. If you do not plan your estate, your state law will plan it for you. So, there is a plan if you don’t make one.

As we meet hardened non-planners, we’re tempted to say, worry not, plan not, it is your choice for big brother already has a plan to dispose of your property. Each of the 50 states has laws that prescribe in great detail what happens to a citizen’s property if there is no will or no will substitute. These laws are generally referred to as a statutes of dissent and distribution, or as statutes of intestate. Intestate is the word used to describe not having a will. Big Brother will distribute the property of non-planners to the state sanctioned heirs. The result can at times be most discomforting. In order to illustrate how these laws, work, let us examine the statutes of a typical state. Sometimes people will over use joint tenants with rights of survivorship between spouses as that’s the most common way married people own their property. If you over use joint tenants with rights of survivorship, it’s possible for assets to pass to other people besides the intended descendants, or children, or grandchildren.

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 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 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 minimizing 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.

Probate is the legal process of passing ownership of property from a deceased person to others. Probate courts have been a part of legal heritage for centuries. Every county in every state of the United States has its own probate court. These courts are not always called probate courts. Sometimes they’re called surrogate or common courts. Regardless of their names, these courts all have the same purpose, passing ownership of property to the heirs of people who died with a will or no will at all.

The probate agent is responsible for most of the work to be accomplished in this process. That agent reports to the court and through the estate’s attorney. The probate agent is given different names in different situations and different states. Generally, this agent is called the executor, or the administrator, or the personal representative. These agents, regardless of their titles, are responsible for doing the work in the probate process. They work for the court or judge. Probate is a complicated legal process. The estate or agent relies on an attorney for assistance in getting through the legal process. At times the attorney will and can do most, if not all, of the work, but in some probate proceedings, the attorney does very little work. Both the probate agent and the probate attorney are entitled to compensation for serving in their prescribed roles. Their fees are usually determined by state statute, but may be reviewed and awarded by the probate judge. Probate judges are generally non-practicing or retired attorneys. They can be brilliant or not so brilliant. They are, after all, people. Most probate judges, in our opinion, are overworked and underpaid.

Most practicing attorneys handle probate cases. This is particularly true in rural areas and among attorneys who conduct general practice. The nature of the work is time consuming, and most of the time, is not intellectually difficult. The economic rewards can be ample or splendid, depending on who’s point of view is being considered.

The probate process, though complicated and confusing to most people, can be reduced to the following: understanding the will, ascertain errors, locate and value all the property, contact the agent and the attorney, ascertain and pay creditors of the estate, resolve all controversies between the parties, file tax returns, and then distribute the property.

Probate agents and probate lawyers are generally, according to the laws of most states, first class creditors. They get paid off the top. In fact, they get paid before other creditors and always before the state or federal government. That is why it is very important to make an estate plan that can avoid the probate process. That’s why it is very important to plan to minimize the probate process and use private means to manage and transfer assets to beneficiaries.