A Quick Hit on Life Insurance Trusts

Life insurance is a countable asset for both estate tax purposes and Medicaid/Title XIX purposes. Medicaid allows an applicant to own up to $1,500 of cash value in a life insurance policy. All other cash value increases the Medicaid penalty period. After death, the proceeds of a life insurance policy are included on an estate tax return if the policy was owned by the insured. This can result in significant estate tax consequences when the value of the estate exceeds the estate tax exemption.

However, a good estate planner can create an instrument which will avoid those taxes and protect your life insurance from Medicaid: a life insurance trust. A life insurance trust is irrevocable. This means that the person who is insured is not the owner. The trust acts as owner and beneficiary on the life insurance policy, meaning that the life insurance proceeds are completely outside the estate. Furthermore, since the life insurance trust is the owner of the policy, the cash value is not counted as an asset of a Medicaid applicant.

Life insurance trusts have many other purposes as well, including protection of business assets, with a separate fund of cash or pre-planning for funeral costs like in our Funeral Planning Trust. Ask your attorney if a life insurance trust is right for your estate plan.

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Lawyer Joke of the Day:

The New York Times, among other papers, recently published a new Hubble Space Telescope photograph of distant galaxies colliding.

Of course, astronomers have had pictures of colliding galaxies for quite some time now, but with the vastly improved resolution provided by the Hubble, you can actually see the lawyers rushing to the scene.

Life Insurance: An Estate Planning Safety Net

One extremely effective tool for effective and efficient estate planning can be found in life insurance. Life insurance can be utilized in an estate plan to increase your heirs’ inheritance or to generate cash for the payment of debts and taxes.

Generally speaking, life insurance is an includable asset when the size of an estate is calculated for an estate tax return. Life insurance proceeds are included because, usually, the insurance policy was owned by the person who died. They paid the premiums and retained control over the cash value and beneficiaries on the policy. Life insurance that was not owned by the deceased is not part of his or her estate.

Often, estate taxes are not an issue for an estate – especially now, with the estate tax exemption set at $5 million. Life insurance is still an effective estate planning tool because it allows you to generate cash after your death which your heirs can then use to pay any debts you may have at your death. Using life insurance to generate cash for your debts means your executor will not have to sell off your property to pay off your mortgage or credit cards.

Another effective way to utilize life insurance in your estate plan is to buy a life insurance policy to cover your estate tax liability. You can do this without increasing the value of your estate by placing that policy into an irrevocable trust. There are several nuances to utilizing this strategy, so you should talk to your estate planner to see if this is a viable option for your estate.

These two options (and many others) provide a safety net for your estate plan, helping ensure your assets go to the people you want to receive them instead of being sold to cover your liabilities.

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Lawyer Joke of the Day:

Q: What do you call a smiling, sober, courteous person at a bar association convention?
A: The caterer.

Three Questions About Probate: Part Two

“He neither drank, smoked, nor rode a bicycle. Living frugally, saving his money, he died early, surrounded by greedy relatives. It was a great lesson to me.”

- John Barrymore

Today we continue our discussion of the three main questions I get from heirs and executors. Question two:

What happens during probate?

I like the way the ABA talks about probate in its book Guide to Wills and Estates, Third Edition. They describe probate as having six main phases. Each of these phases is necessary before the terms of a will are fully carried out. Here is my take on those six phases:

1. Open the Estate: Typically, when an individual dies, that person’s family tracks down a copy of his or her will and seeks the help of an attorney in deciding what the next step should be. If they hire that attorney, he or she will work with the executor to give the will its full effect. This involves filing a probate petition with the district court and giving notice to the creditors of the deceased.
2. Collecting the Estate’s Assets: Once the probate case has been opened, the family begins compiling a list of the deceased person’s assets. The myriad assets and their values are listed in the probate inventory and submitted to the court.
3. Management of Assets: Sometimes a probate occurs at a time when the deceased was scheduled to receive income. Other times, the probate process takes a long time to complete. In these situations, the executor must manage the estate’s assets. If income is received, it should be accounted for and saved or possibly invested.
4. Handling Taxes: An estate is subject to several different types of taxes. The ones most people think of are the “death taxes.” This includes federal estate taxes and state inheritance taxes. Under the new law that was passed in December 2010, the current estate tax is capped at 35% and only applies to individual estates worth over $5 million. Inheritance taxes vary from state to state and often change year to year. These taxes are imposed based on the heirs’ relationship to the deceased. An estate is also subject to income taxes if that estate should receive income before it is closed. In that instance, the executor will need to file an income tax return for the estate to report its income and potentially pay the resulting taxes.
5. Closing the Estate: Finally, after all the necessary notices have been given, the estate can be closed. Completing this phase typically requires filing lots of forms and getting a final order back from the court indicating that all necessary steps have been followed and the executor can distribute the assets. In Iowa, the executor files a final report showing how the property is passing to the heirs.
6. Distributing the Assets: Finally, after all five other phases are completed, the executor may distribute the assets of the deceased to his or her heirs.

Probate involves a lot of steps and requires a certain level of expertise or familiarity with the process to be efficient at it. It is always smart to seek the assistance of an attorney in the event that you are appointed as executor of a loved one’s estate. Contact us by phone or e-mail to see how we can help you through the probate process.

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Lawyer Joke of the Day:

Nugent needed legal advice, so he walked into the office of Gregory, Ellis and Gregory. Nugent sat down at the desk of the senior member of the firm.

"If you're not in really bad trouble, I'll take the case," said Gregory. "If you're in a real jam and want to get out of it, my partner will handle it.

“If, on the other hand, you're not involved and want to get in trouble, my son, who just graduated from law school, will take it!"

Three Questions About Probate: Part One

“Death is not the end. There remains the litigation over the estate.”

- Ambrose Bierce

The death of a loved one is a difficult time in anyone’s life. Being thrust into the role of executor can sometimes feel overwhelming. At my initial meeting with an executor of an estate, I often find that the best place to start is to answer the the three questions that are the subject of my next three blogs. First:

What is probate?

“Probate” can be used in two different ways. As a noun, “probate” means the judicial process of validating a will. A will must be submitted to the courts to make sure first that it is valid, second that its terms are legal, and third that its terms are carried out. As a verb, “probate” is the procedural steps an executor takes to settle an estate. Taking these steps is known as probating the will.

You may have noticed that one thing is consistent in both of these definitions: a will. In order to use the term “probate,” the deceased person must have prepared a will. If there is no will, it is not probate. There is still a procedure for distributing the estate, however. That procedure is called administration, and we’ll talk about it more on Friday.

Probating a will can take several different forms. If people know anything about probate, they almost always know about the judicial proceeding. This, however, is not always the most appropriate means of probating an estate. An estate with a low total value and no debts might qualify for a simple procedure called “small estate administration.” In Iowa, the maximum value for small estate administration is $100,000.

In even smaller estates, an affidavit can suffice in place of the probate process. To utilize this method, the estate must have a value of less than $25,000 and cannot include real property. The waiting period required before an estate can be closed is forty (40) days.

Choosing an inappropriate or improper method of dealing with your estate can be fatal. Always seek the advice of an attorney when dealing with a complex issue like probate.

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Lawyer Joke of the Day:

"You seem to be in some distress," said the kindly judge to the witness. "Is anything the matter?"

"Well, your Honor," said the witness, "I swore to tell the truth, the whole truth and nothing but the truth, but every time I try, some lawyer objects."