Life insurance ownership

If I have term life insurance for 5 million dollars, owned by my wife, with my wife the primary beneficiary and our kids the contingent beneficiaries, and we both die simultaneously, will there be estate tax? (assume our wills have eachother as primary beneficaries and kids as secondary for everything)

Thanks

Reply to
nesss01
Loading thread data ...

First, I don't believe you are allowed to die simultaneously, but the point is moot, given the rest of your question.

Your wife owns the policy, so the $5M is in her estate upon your death. If you can plan your death for 2010, there is no estate tax, but before or after, there are exempt amounts lower than that $5M.

The simplest solution is to transfer the policy at the next renewal date to the kids. Then each year, gift them the funds needed to pay the premium. Then, on your death, they collect with no estate tax consequence at all.

There are more convoluted ways to set this up with trusts preserving your exemption and your wife's ability to tap some proceeds before she passes, but keeping the money from first passing through your estate and then hers. This is more applicable to assets with a present value, for people actively trying to get money out of their taxable estate.

(The above is an oversimplification, more details can run a couple pages)

JOE

formatting link

Reply to
joetaxpayer

In addition to these reasons, it may be wise to use a trust because:

  1. With the children as owners, they can make changes to the policy without dad's approval.
  2. Past courts have ruled that if the grantor (the policy owner) maintains incidences of ownership after the gift, then the gift is not completed and reverts back to the estate. Its easier for a judge to imagine a father exerting control over his children than he can a grantor exerting control of a trustee bound by fiduciary duty. In reality, most of the trustees I know check with the grantor before they do anything, but on the surface it looks more kosher to the IRS.

All that said, an ILIT can be simple (with no ongoing maintenance) and inexpensive to establish if one avoids all the unnecessary bells and whistles available.

Reply to
kastnna

Not "allowed"? Are there rules as to when you can die?

Elizabeth Richardson

Reply to
Elizabeth Richardson

I understood that even in a tragic accident such as a plane crash, that for legal purposes, one spouse is presumed to die before the other. Most inheritance is based on order of passing and none I've seen account for a simultaneous set of deaths. I've not dug too deeply into this topic, but I see the need coming....

Reply to
joetaxpayer

There are multiple references to this, one of which is at

formatting link
states: "The Uniform Simultaneous Death Act provides that if an insured person under a life policy and a beneficiary die at once, the insured will be presumed to have survived, unless otherwise provided. In that case, the policy proceeds would go to the alternate beneficiary." I believe the OP still needs to understand the estate tax implications, and the savings possible by a change of ownership of the policy. JOE

Reply to
joetaxpayer

If my wife has any say so, there are definitely rules as to when I can die :)

But for our purposes, the USD Act is very valuable. Frex, suppose husband and wife with no children each die in a plane crash. However, hubby lives for 2 days before dying of injuries.

Without the law, the wife's estate passes to him for 48 hrs and then both his estate and her [former] estate pass to HIS heirs. Her heirs receive nothing. With the law, the wife's estate assumes hubby died first and HER heirs receive her estate. Hubby's estate assumes she died first and HIS heirs receive his estate. By far a more equitable solution, me thinks.

IIRC, the time period for simultaneous death is 5 days and it doesn't even have to be from the same event. I need verification on this though.

Reply to
kastnna

Thanks all. I think I understand the importance of change in ownership of the policy, and that this change can be simple, by just transferring it to another person, or more complex by transferring to a trust.

What I am having difficulty with is reconciling that there seems to be a consistent affirmation that if the policy is owned by someone other than the deceased/insured, there should be no estate tax, with the fact that it seems in the hypothetical case I presented, where the policy is indeed owned by someone other the insured/deceased, and even according to the The Uniform Simultaneous Death Act that you quote, the payout would go straight to the kids and not to my wife first, that there is estate tax.

Can some> joetaxpayer wrote:

at

formatting link
which states: "The Uniform Simultaneous Death Act provides that if an> insured person under a life policy and a beneficiary die at once, the> insured will be presumed to have survived, unless otherwise provided. In> that case, the policy proceeds would go to the alternate beneficiary." >> I believe the OP still needs to understand the estate tax implications,> and the savings possible by a change of ownership of the policy. > JOE

Reply to
nesss01

It is true that if the policy is owned by someone other than the insured it is not include in the INSURED'S estate at their passing, but it is included in the OWNER'S. That's not a problem when only the insured dies (if the owner isn't dead, their estate won't be probated). It does become a problem when the owner dies. Even if your wife dies 20 years after you, if the $5M is still in her estate, it will be included in her estate.

If you are trying to avoid paying estate taxes on this amount (for which I don't blame you) you really should look into a simple trust. Giving ownership to an outside party (i.e. children) is also an option but it brings all new risk into the equation. For instance, what happens when your kid marries someone you disapprove of and then dies prematurely? Do you like the idea of his dispised widow being able to change your beneficiaries?

Reply to
kastnna

Upon YOUR Death, any policy that is in force, that YOU are the OWNER of, regardless of who the insured is, would be included in YOUR Estate.

Conversely, upon your death, any policy currently (and not transferred within the lookback period) that is N O T in anyway OWNED by you prior to death, would NOT normally be included in your Estate. Cal Lester CLU

Reply to
Cal

Kastnna replied as well, but I'll try with a simpler spin. I own (for example) my own policy. When I die, even though the policy has my kid as beneficiary, since I own the policy, it's in my estate for estate tax purposes. For 2006-8, $2M is exempt from estate tax. In

2009, it's $3.5M.

In my case, I don't own any insurance. It's owned by an ILIT (Irrevocable Life Insurance Trust), the trustee will dish out money at my wife's request, if she survives me, and to my child after my wife's death. Now, to Kastnna's point, this is a way to protect the money from some second husband getting his hands on it, or it finding its way to his kids. And my wife may request disbursement of a percentage each year, or just leave it for our child to draw as needed. The premiums are paid each year with money gifted to the trust. If you have no issue with an irrevocable transfer to your kids, a change of ownership can work, but it doesn't protect the kids from the spouses gaining access to the money. As long as you've changed owners, the USDA does not apply, that discussion was more of a tangent to the real important issues. Although any facts like that are worth being aware of. JOE

Reply to
joetaxpayer

If the will is written that way, could not the beneficiary of an insurance policy be made "the estate of XXXX"?

Reply to
Don

Yes, an insurance policy can have "the estate of xxxx" as the bene. It happens quite frequently for an insured to name his estate as the beneficiary, altough it's not advised. There are a handful of ways I THINK this could play out.

  1. If XXXX is the also insured, and the owner is still alive then you've "forced" the M into the insured's estate when it otherwise wouldn't have been (it would have been part of the living owner's assets).
  2. If XXXX is NOT the insured and the owner is still alive there should be no major problems. However, it might be a pain for XXXX to try and get a M check cashed that is made out to his estate even though he is still alive. XXXX's heirs might even sue him on the grounds that the M was intended to go to his estate (IOW them), not XXXX's pocket (this might be reaching, I'm just speculating out loud).
  3. If in any of these instances XXXX is also dead, you've just added M to their XXXX's estate (that's bad, tax-wise).

Somebody please double check my reasoning. I've "thunk" myself in circles on this one.

Reply to
kastnna

One last "nudge" towards the ILIT:

As Cal mentioned there is a three year look-back when gifting an EXISTING insurance policy to an ILIT. If you gift this policy to an ILIT and die within three years, ownership is reverted back to the original owner, not the ILIT. That's one reason to not delay doing this (if you are indeed thinking about this). Obviously, newly issued policies do not have a look back because the had no previous owner.

Putting this policy in the ILIT is a gift subject to all the rules and requirements set by the IRC. As Joe said, the annual premium payments you make would also be gifts. If the premiums exceed the annual gift exclusion, that complicates things (but not much).

Luckily this policy is term (it has no cash value). When gifting a cash value policy, that value is also considered a gift. That can be a major drawback for policies with large cash values. The IRS has been grumbling about this inequity for years. They have been pushing for using the interpolated terminal reserve or the open market value of a policy as the true value. IF they ever succeed, it will mean that a term policy will have the same gifting drawbacks as permanent insurance. Maybe they will grandfather existing ILITs, maybe the won't.

Reply to
kastnna

I probably will set up a trust but I still want to understand the law.

So it seems it is incorrect to say that if a policy is owned by someone other than the insured that there is no concern of estate tax. There is indeed still a concern, it is merely shifted from the insured's, to the new owners estate. Is this correct?

If so, i have 2 followup questions..

1) In the case where the insured and owner are different people, and the insured dies and owner is still alive, shouldn't there be some kind of gift tax as 5 million dollars passes from the owner to the beneficiary?

2) Isn't an estate tax applied when assets leave an estate because of the estate owners death? If so, then in my original simultaneous death case, the policy is not leaving my wife's estate because of her death, it is leaving it because my death triggers the payout to the kids (as the wife, the primary beneficiary is also dead at the time of my death)- and then the policy ceases to exist. in the case where she lives 20 years after me, its not the policy that is a problem its, the actual cash that she got 20 years ago when I died. In my hypothetical situation, she never has the actual cash, and the policy leaving her estate is not due to her death.

Thanks

======================================= MODERATOR'S COMMENT: Please trim the post to which you are responding. "Trim" means that except for a FEW lines to add context, the previous post is deleted.

Reply to
nesss01

Absent a trust, you could say this.

As it's set up now, your wife will collect on your death. Unlimited spousal transfer applies. It's when she passes, there is an estate tax issue. Unless, of course, she spends it, or gifts it away over time.

If you die at the same time, or she dies years later, there's little difference, that $5M is an estate tax issue. With no trust, you can change owners, getting the payout out of your estate, as we've discussed. How many kids? Dishing it out to 2-3 kids, they may very well burn through the money with no estate worry of their own. Remember, your wife has $12K/yr/person. If she has 20 years, she gift away quite a bit between the kids and grandkids. JOE

Reply to
joetaxpayer

YES

Reply to
Cal

BeanSmart website is not affiliated with any of the manufacturers or service providers discussed here. All logos and trade names are the property of their respective owners.