Estate Planning Newsletter

• Trusts Organized Under Foreign Laws in Order to Protect Assets
  In today’s litigious society more individuals are inquiring about asset protection planning, especially those individuals with a high risk of potential exposure to liability, such as business owners, doctors, or those involved in... Read more.
• Conservators of the Person and of the Estate
  A “conservator” is a court-appointed individual assigned to handle the daily affairs of those who cannot care for themselves due to physical or mental limitations (the “conservatee”). Conservatorships are... Read more.
• Claiming the Death Benefit on a Life Insurance Policy After the Insured Dies
  The beneficiary of a life insurance policy is the person entitled to receive the death benefit of the policy when the insured person dies. In order to collect on a death benefit claim, the beneficiary must usually comply with specific... 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.

• Estate planning dos and don’ts
• The Four Key Documents of an Estate Plan
• Estate Planning: When one spouse becomes incapacitated
• ‘All Lined Up Before You Need It’: Alzheimer’s Association Shares Steps For Estate Planning
• Liza Horvath, Senior Advocate: Deathbed estate planning

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.

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