Estate Planning Newsletter

• Trusts & Powers of Attorney
  If you become incapacitated, who is supposed to make decisions for you about the management of your property or your health care? A durable power of attorney allows someone you designate to act on your behalf. It is usually included as... Read more.
• Calculating Fair Market Value for Charitable Donations of Property
  The U.S. government has long encouraged citizens to contribute to charity. One method of encouraging philanthropic giving is the allowance of deductions from income for federal tax purposes for donations to “qualified”... Read more.
• Converting a Home Into a Source of Income: Reverse Mortgages
  Many are familiar with the concept of a mortgage, where an individual makes monthly payments to a lender. However, for those who qualify, there is another type of mortgage called a “reverse mortgage” (RM), where the lender... Read more.
• Designating Another to Make Health Care Decisions
  A power of attorney is a document that authorizes one or more individuals (collectively referred to as the “agent” or “attorney-in-fact”) to act on behalf of the person executing the document (the... Read more.

• Chadwick Boseman Died Without A Will: 3 Reasons Why Estate Planning Is Important Even Without A Lot Of Wealth
• Election outcome may make gift tax exemptions much less available
• Auditing Your Estate Plan
• Thinking About The Unthinkable In Your Estate Planning
• As dispute over former Hart estate in Glenview continues, total legal fees top $100,000

Tax Consequences When a Marital Settlement Agreement Requires Life Insurance

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.

© 2020 NextClient.com, Inc. All rights reserved.