Bisignano Harrison Neuhoff LLP

214.360.9777

5949 Sherry Lane, Sterling Plaza
Suite 770, Dallas, Texas 75225

Estate Planning Newsletter

  • The Cy Pres Rule
    If you create an estate planning document leaving property to a charity, but after your death the transfer cannot occur, the court may apply the cy pres rule. The words “cy pres” are French for “as near.”... Read more.
  • The Uniform International Wills Act and U.S. Law
    The Convention on the Form of an International Will (the “Convention”) was drafted and presented to the international community in 1973. The Convention was signed and ratified by a number of countries, including Canada and... Read more.
  • The Effect of Inheritance on Child Support Payments
    The federal Child Support Enforcement Act of 1984 requires each state to develop its own set of systematic guidelines for calculating awards of child support. Generally, state child support guidelines are based on the parents’... Read more.
  • Estate Tax Changes Bring Calm After the Storm
    Much to the relief of many, the American Taxpayer Relief Act of 2012 (“2012 Tax Act”) was enacted in the beginning of 2013, making permanent many of the tax benefits that were scheduled to expire at the end of 2012. The... Read more.
Estate Planning News Links

Marital Settlement Agreements and Life Insurance Policies

Many marital settlement agreements require one party to maintain a life insurance policy on his or her life naming the former spouse as the primary beneficiary. While this provides some financial security for the former spouse, it may also result in an adverse unintended tax consequence for the insured spouse’s estate.

For example, if the ex-husband is required to maintain a $1 million life insurance policy on his life, naming his ex-wife as beneficiary, on the ex-husband’s death his ex-wife will receive the $1 million face amount of the policy directly from the life insurance company. If the ex-husband was the owner of the life insurance policy and paid the premiums on the policy, the IRS will include the $1 million face amount of the policy in the ex-husband’s estate for the purposes of calculating the amount of estate tax owed by the ex-husband’s estate. If the ex-husband died in 2013 with a taxable estate of $5.25 million plus the $1 million in life insurance, the inclusion of the life insurance proceeds would result in a $400,000 increase in the estate tax owed.

The foregoing result may be avoided through the use of a tax-sensitive marital settlement agreement and an irrevocable life insurance trust. The ex-husband may still be required to maintain a $1 million life insurance policy with his ex-wife as beneficiary, but the life insurance policy would be owned by the trustee of the irrevocable life insurance trust. The ex-husband may transfer money to the trust for the payment of the premiums. Since the payments are required pursuant to a court order, the payments are not considered taxable gifts. Since the irrevocable life insurance trust, not the ex-husband, is the owner of the policy, the $1 million life insurance policy will not be included in the ex-husband’s estate for the purpose of calculating the estate tax owed.

Share This Page:
Contact Form Tab