Monthly Archives: November 2013

Common Estate Planning Mistakes – First in a Series

Estate Planning is especially complicated and, many times, mistakes can be quite costly both financially and emotionally.  I will discuss a number of common – and avoidable – estate planning mistakes over the next few posts.

Mistake #1:  Improper use of Jointly Held Property.

If excessively used or used by the wrong parties (especially by unmarried individuals), the “poor man’s will” becomes just a poor will.  For instance, double estate taxation is a distinct possibility if the joint ownership is between individuals other than spouses.  Also, in the case of a married couple, holding property jointly equates to a total loss of control at death since the surviving spouse can ignore the decedent’s wishes and dispose of the property any way the survivor chooses.  This is especially troublesome when the joint owners are in a second marriage.

Mistake #2:  Improperly Arranged Life Insurance.

Inadequate life insurance on the life of the breadwinner or on the “key-person” in a corporation can bring stinging financial hardship.  Many times, the proceeds of the policy is includable in the insured’s estate because he or she bought the policy and either never transferred the ownership to a third party (not the spouse) or remained in control (called “an incidence of control”) of the policy in some manner.

Mistake #3:  The Unholy Triangle.  This is really an offshoot of #2 but it deserves it’s own paragraph.  This occurs when three separate entities / people are party to a life insurance contract.  For example, if the wife is the owner of a life insurance policy on the husband (the insured) and the children are made the beneficiaries, then the proceeds are considered a taxable gift to the children.  We will cover more on this topic in a later post.

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Business Continuation for More Than Two Owners – First in a Series

One of the most perplexing issues facing business owners is how to transfer a business to successive owners. This gets especially more complicated when the transfer involves more than two business owners. Assuming that the owners (called shareholders) have a competently written Buy / Sell Agreement, the question becomes how to structure the funding mechanism. That is, what entity owns the life insurance policies that cover each shareholder and how do you make this the most tax-efficient for everyone involved?
The easiest – and least tax-efficient – is for the Company to be the owner and beneficiary for all the life insurance policies. This way, when an insured dies, the life insurance proceeds get paid directly to the Company, which then retires the deceased’s shares and pays the heirs the fair market value of those shares, which is presumably the amount of the death benefit of the life insurance paid. By extension, the remaining owners’ shares appreciate by the value of the deceased shares. The trouble with this arrangement is that the tax basis for these shares remains the same. This means that, when the remaining owners sell their shares in the business, they pay capital gains on everything over-and-above their original tax basis – including on the appreciation from the newly acquired shares.

Can they do better? Most definitely yes! For more info, go to:

The Unholy Triangle

This is sometimes referred to as “The Unholy Trinity.”  Either way, it’s bad news for the life insurance policy owner and family!  Every life insurance contract has three parties:  the owner, the insured and the beneficiary.  You’ll want to make sure that two of the three parties are the same person.  For example, the owner and the insured are typically the same person while the beneficiary is someone else.  In most cases, this means that the death benefit will remain tax free.

If, however, each party is different, then the life insurance proceeds are considered a taxable gift to the beneficiary!  This happens more often than you may think.  For example, a wife (the owner) may take out a life insurance policy on her husband (the insured) and designate their son as the beneficiary.  Oops.  Three different parties equals a taxable event that no one saw coming!

Best way to avoid this?  Get a competent advisor!  For more info, go to:

Life Insurance AND Long-Term Care Together?

Yes, you read that right! The life insurance industry has put together these two products. One major reason why many people (including me) never bought a long-term care insurance policy is that, if you never use the policy, you lose all the money that you invested in it. Can you afford to throw your money away?

Another reason is that, with a stand-alone Long-Term Care policy, the premiums can increase at any time – for any reason. Doesn’t quite give you that “warm and fuzzy,” does it?

Well, the Life Insurance and Long-Term Care policy addresses those and other concerns. For instance, if you pass away never having used the Long-Term Care part of the policy, that’s where the Life Insurance kicks in, and your family receives the tax-free death benefit. In my world, this is what we call “cost recovery.” Also, once you’ve been approved, your premiums remain the same! No changes in your premiums should your health deteriorate or if you do what most people want to do and that is get older.This combination has many more advantages. Please contact me if you’d like to know more:

Tax-Free Life Insurance Policy Exchanges

Also known as a 1035 exchange, a tax-free life insurance policy exchange involves the transfer of the cash value of one policy into another, permanent life insurance policy.  What should be obvious is that, once the cash-value transfer is made, the old policy is cancelled.

Why would you want to make this move?  Throughout my career, I have encountered a number of good reasons to do this:

1.  Because of a number of factors (discussed in previous articles), your old policy is projected to lapse.  So, instead of throwing good money after bad, you’ll want to invest those funds into a life insurance policy that will be around when your family needs it.

2.  Because of market efficiencies and increased longevity, life insurance costs have decreased over the last decade.  This means that your old life insurance policy simply costs more than a new one. You may also be able to get more life insurance protection by changing to a newer, less expensive life insurance policy.

3.  Your life and priorities have changed, and your old life insurance policy doesn’t fit your new needs.  For example, you’ve gotten older and have seriously thought about getting a long-term care policy.  Well, now you can get both: a no-lapse guarantee life insurance policy combined with a long-term care rider – all in one policy!  That may work very well for a number of consumers.

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