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How does life insurance fit into my estate plan?

Life insurance can be an integral part of an estate plan. Policies can be set up to be paid directly to the beneficiary, without the need to pass through the estate. Having a life insurance policy ensures that some assets will be liquid, so that debts and expenses can be paid quickly and easily without the need to dispose of assets. Beneficiaries can be changed at any time as can the benefit amount. The policy can be used to accumulate savings if the plan is surrendered before death. Life insurance policies, especially those purchased later in life, can pay out significantly more than what was invested into them. There are many benefits to purchasing a life insurance policy as part of an estate plan.

An attorney can set up a life insurance trust to help avoid estate taxes. A life insurance trust must be irrevocable, cannot be managed by the policy holder, and must be in place at least three years before the death of the policy holder. Any money received from the life insurance trust is not a part of the taxable estate. The need for this is rare as the exemption for estate taxes is currently almost five and a half million dollars, but it is a useful tool for some nonetheless.

There is a limit to how much life insurance an individual is permitted to purchase. A person may carry a multiple of his or her gross income which reduces with age. A twenty five year old can buy a policy worth thirty times his or her annual income. A sixty five year old may only purchase ten times his or her annual income worth of life insurance. This is an important factor to consider when deciding whether life insurance should be a part of your estate plan.

Life insurance as a part of estate planning is a complicated issue. It makes sense to consult with an estate attorney and a tax professional before meeting with an insurance broker. Both can help an individual understand the benefits of insurance over other means of transferring assets.

Young and Ill, without Advance Directives

When you are a child, your parents serve as your decision makers. They have ultimate say in where you go to school, what extracurricular activities you partake in and where, and how, you should be treated in the event of a medical emergency. While most parents continue to play a huge role in their children’s lives long after they reach adulthood, they lose legal decision-making authority on that 18th birthday. Most young adults don’t contemplate who can act on their behalf once this transfer of power occurs, and consequently they fail to prepare a health care directive.

In the event of a medical emergency, if a young adult is conscious and competent to make decisions, the doctors will ask the patient about his or her preferred course of treatment. Even if the individual is unable to speak, he or she may still be able to communicate by using hand signals or even blinking one’s eyes in response to questions.

But what happens in instances where the young adult is incapacitated and unable to make decisions? Who will decide on the best course of treatment? Without advance directives, the answer to this question can be unclear, often causing the family of the incapacitated person emotional stress and financial hardship.

In instances of life threatening injury or an illness that requires immediate care, the doctors will likely do all they can to treat the patient as aggressively as possible, relying on the standards of care to decide on the best course of treatment. However, if there is no “urgent” need to treat they will look to someone else who has authority to make those decisions on behalf of the young individual. Most states have specific statutes that list who has priority to make decisions on behalf of an incapacitated individual, when there are no advance directives in place. Many states favor a spouse, adult children, and parents in a list of priority. Doctors will generally try to get in touch with the patient’s “next of kin” to provide the direction necessary for treatment. States also have laws providing for the appointment of a guardian who would have authority to make decisions for an incapacitated individual. A guardianship proceeding can be costly

A number of recent high-profile court cases remind us of the dangers of relying on state statues to determine who has the authority to make healthcare decisions on behalf of the ill. What happens if the parents of the incapacitated disagree on the best course of treatment? Or what happens if the patient is estranged from her spouse but technically still married- will he have ultimate say? For most, the thought is unsettling.

To avoid the unknown, it’s highly recommended that all adults, regardless of age, work with an estate planning attorney to prepare advance directives such as a Health Care Directive that includes a health care power of attorney (or health care proxy) as well as a living will that outline their wishes and ensure compliance with all applicable state statutes.

Common Estate Planning Mistakes Regarding Individual Retirement Accounts (IRAs)

For many people, retirement savings accounts are among the largest assets they have to bequeath to their children and grandchildren in their estate plans. Sadly, without professional and personally tailored advice about how best to include IRAs in one’s estate plan, there may be a failure to take advantage of techniques that will maximize the amount of assets that will be available for future generations.

Failure to Update Contingent Beneficiaries

Assets in an IRA account usually transfer automatically to the named beneficiaries upon the death of the account holder, outside of the probate process. If the account holder’s desired beneficiaries change, due to marriage, divorce, or other major life events, it is critically important to update the named beneficiaries as quickly as possible to prevent the asset from passing to an outdated beneficiary. When updating beneficiaries, account holders should not neglect contingent beneficiaries – those individuals named to receive the asset if the primary named beneficiary is already deceased when the account holder dies.

Example: Sarah’s IRA documents name her husband, Harold, as the primary beneficiary of her IRA. The contingent beneficiary is Harold’s son, George, from Harold’s first marriage. Sarah and Harold divorce. Harold dies. If Sarah dies before changing her IRA beneficiaries, George will receive the IRA. This may no longer be the result Sarah would have wanted.

Failure to Consider an IRA Trust

There are three main advantages of naming a trust as the contingent beneficiary of your IRA:

It avoids the problem described above of having incorrect contingent beneficiaries named at death.
It protects the IRA if the desired beneficiary is a minor, has debt or marital troubles, or is irresponsible with money.
It protects the IRA from intentional or unintentional withdrawal.

Since 2005, the IRS has allowed a type of trust created specifically to be the beneficiary of an IRA. The IRA Beneficiary Trust is also known as an IRA trust, an IRA stretch trust, an IRA protection trust, or a standalone IRA trust.

The main advantage of using an IRA Beneficiary Trust instead of a standard revocable living trust is that the IRA trust can restrict distributions to ensure compliance with tax rules and minimum distribution requirements – thus maximizing the amount of tax-free growth of the investments.
Another advantage is that the IRA stretch trust has a framework that allows it to be structured in a way that guarantees protection of the distributions from the IRA as well as protection of the principal of the IRA. When you first establish the IRA protection trust, you structure the trust as either a conduit trust or an accumulation trust. A conduit trust will pass the required minimum distributions directly to your named beneficiaries, maximizing the tax deferral benefits. An accumulation trust passes the required minimum distributions into another trust over which a named trustee has discretion to accumulate the funds, resulting in greater asset protection for the benefit of the beneficiary.

During your lifetime, the IRS allows you to switch between the conduit trust and accumulation trust for each of your beneficiaries, as circumstances change. Furthermore, you may name a “trust protector” who may change the type of trust one last time after your death. This change may be made on a beneficiary-by-beneficiary basis, so that some of your intended heirs have accumulation trusts for their portion of the IRA and others have conduit trusts.

IRA Beneficiary Trusts are complicated legal documents with intricate IRS rules and tremendous implications for your family’s wealth accumulation for future generations. It is wise to seek advice specific to your family’s unique circumstances when considering the establishment of this powerful type of trust.

Joint Bank Accounts and Medicaid Eligibility

Like most governmental benefit programs, there are many myths surrounding Medicaid and eligibility for benefits. One of the most common myths is the belief that only 50% of the funds in a jointly-owned bank account will be considered an asset for the purposes of calculating Medicaid eligibility.

Medicaid is a needs-based program that is administered by the state. Therefore, many of its eligibility requirements and procedures vary across state lines. Generally, when an applicant is an owner of a joint bank account the full amount in the account is presumed to belong to the applicant. Regardless of how many other names are listed on the account, 100% of the account balance is typically included when calculating the applicant’s eligibility for Medicaid benefits.

Why would the state do this? Often, these jointly held bank accounts consist solely of funds contributed by the Medicaid applicant, with the second person added to the account for administrative or convenience purposes, such as writing checks or discussing matters with bank representatives. If a joint owner can document that both parties have contributed funds and the account is truly a “joint” account, the state may value the account differently. Absent clear and convincing evidence, however, the full balance of the joint bank account will be deemed to belong to the applicant. These rules do vary by state so it is important to understand how your state treats jointly held bank accounts when it comes to Medicaid eligibility.

Medicare vs. Medicaid: Similarities and Differences

With such similar sounding names, many people mistake Medicare and Medicaid programs for one another, or presume the programs are as similar as their names. While both are government-run programs, there are many important differences. Medicare provides senior citizens, the disabled and the blind with medical benefits. Medicaid, on the other hand, provides healthcare benefits for those with little to no income.

Overview of Medicare:

Medicare is a public health insurance program for Americans who are 65 or older. Medicare is regulated under federal law and applied uniformly throughout the United States. Medicare pays for hospital care and medically necessary treatments and services but does not pay for long-term care. Medicare can cover payments for certain rehabilitation treatments. For example, if a Medicare patient is admitted to a hospital for at least three days and is subsequently admitted to a skilled nursing facility, Medicare may cover some of those payments. However, Medicare payments for such care and treatment will cease after 100 days.

Overview of Medicaid:

Medicaid is a state-run program, funded by both the federal and state governments. Because Medicaid is administered by the state, the requirements, procedures, and even the name, vary across state lines and you must look to the law in your area for specific eligibility rules. The federal government issues Medicaid guidelines, but each state gets to determine how the guidelines will be implemented. Medicaid is a health care program based on financial need and will cover long-term care. To qualify for Medicaid you must meet strict requirements that demonstrate a financial need – this includes considering assets of both spouses and a 60 month lookback period to scrutinize any unauthorized transfers of assets.

While Medicare and Medicaid do have some similarities, there are many differences. And as Medicaid is a state specific program it is important to talk to an elder law attorney in your state to understand the specific requirements for eligibility in your state.

How does life insurance fit into my estate plan?

Young and Ill, without Advance Directives

Common Estate Planning Mistakes Regarding Individual Retirement Accounts (IRAs)

Joint Bank Accounts and Medicaid Eligibility

Medicare vs. Medicaid: Similarities and Differences

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