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.