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Estate Planning: Improperly Arranged Life Insurance?

Through our experience as estate planners, we have assisted a great many clients with life insurance planning. Here are some of the most common problem areas that we have encountered:

• Life insurance proceeds are often payable to a beneficiary at the wrong time, i.e., before that person is emotionally, physically or legally capable of handling it. Sometimes, the proceeds are payable to a beneficiary in the wrong manner---outright instead of being paid over a period of years or paid to through a specially-designed trust.

• Whole life insurance is purchased where term insurance would be more appropriate; conversely, sometimes term insurance is acquired when the more appropriate choice would have been some form of whole life insurance.

• There is inadequate insurance on the life of the key person in a family (the "breadwinner"), the homemaker with one or more minor children or the key person in a corporation ("the rainmaker").

• Often, no contingent (backup) beneficiary has been named on the policy.

• Needless estate tax could be incurred; The proceeds of the policy are includible in the gross estate of the insured because the policy was purchased by the insured and transferred within three years of the insured's death. One solution is to have the ultimate beneficiary use his or her own money to purchase and own the policy from inception. That party should also be named beneficiary.

• A life insurance is not used. When the insured wishes to benefit first his surviving spouse and then his children who are minors, a life insurance trust should be the owner. Setting up a trust to own the policy removes the proceeds from the estate. Income from the proceeds can be made available from the estate. Income from the proceeds can be made available to the surviving spouse for life. At the death of the surviving spouse, no estate tax is due...and the children can receive the remaining funds estate tax free.

• Insurance proceeds are paid to a "problem" estate. Even when there is no possibility of any Federal estate tax, sometimes it will be advisable to still avoid having the insurance proceeds paid to thee state since it could be needlessly subjected to the claims of the insured's creditors and in many states unnecessarily subjected to state inheritance tax costs. Probate costs are increased without reason and the proceeds are then subjected to the potential for an attack on the will or an election against the will.

• Generation-skipping transfer-tax rules are ignored potentially subjecting the life insurance proceeds to a needless 55% tax.

Berenson LLP often works with its clients' insurance agents so that these types of problems do not exist. If you need our assistance in this area, please let us know.