LIFE INSURANCE REQUIRES ESTATE PLANNING
Life Insurance can significantly increase the
size of your estate. Life Insurance is oftentimes the single
largest asset left by a decedent. It is frequently the only
asset. People may not own real estate, stocks, bonds, businesses or
savings, yet still have sizable life insurance policies.
Many
buy life insurance to protect their loved ones, their spouses and
their children. Life Insurance can easily provide financial protection
because it is relatively inexpensive, readily available and commonly
used as a part of one's investment strategy. However, many people don't realize that life insurance
proceeds are subject to the federal estate tax. Life Insurance can easily create a
need to apply proper estate planning techniques to reduce or
eliminate the estate tax exposure and avoid the need for costly
legal proceedings to distribute the insurance proceeds.
Estate Planning can avoid the need for probate and conservator proceedings. Proper Estate Planning can greatly reduce or eliminate the requirement for these common legal expenses. These expenses can easily reach into the tens or hundreds of thousands of dollars, taking money away from your children (beneficiaries).
In another article. "Estate Planning Saves Money" I discussed common estate planning techniques used by married couples designed to save money and reduce estate taxes. When you consider life insurance, even a single parent can greatly benefit from estate planning and can significantly reduce legal costs for the administration of their estate.
For example, say a single parent dies owning a life insurance policy in the amount of One Million Dollars ($1,000,000.00). The insured names their child as their beneficiary. If the child is under the age of 18 (a minor), the child does not have the legal capacity to own property. To control and administer the funds, the court must appoint a conservator to hold and control the money until the child reaches legal age. The conservator is usually appointed by the court shortly after the parent's death. This process can take several months. It is a legal proceeding separate and apart from Probate. Once appointed, the conservator holds and administers the funds. He pays for the child's continual care and living needs until the child reaches 18. Conceivably, this could span a maximum time period of 18 years. When the child reaches 18, the conservator delivers all the remaining money to the child and the conservator proceeding ends. The child receives ALL the money outright and no other person has any further control or oversight over the use of these funds. LOOK OUT! ... Common sense tells you that the 18 year old will blow through that Million Dollars very quickly.
Additionally, the conservator proceeding incurs annual administration fees and expenses. These cost continue each and every year the conservator proceeding is in existence. These fees are paid to the child's court appointed attorney, any court appointed visitors, the conservator, physicians, accountants, the court's costs and other administration expenses. Annual costs vary and can be quite expensive. But even if it were only $1,000.00 per year, over the life of the conservator proceeding, those annual costs could equal $18,000.00.....per child. Add to that the initial legal costs to establish and appoint the conservator (est. $12,000.00) and you can easily exceed $30,000.00 spent over the life of the proceeding. Again, that's money paid from the funds YOU intended to give to your child. That money could have been used for their college education, their housing, medical or other needs.
Conversely, by using common estate planning techniques, you can establish a Revocable Living Trust to hold and control the insurance proceeds (plus your other property.) The administration of the Revocable Living Trust requires NO court involvement. With the trust in place (and fully funded before you die) there is no need to appoint a conservator and no need for Probate. The trust stipulates (controls) when and how the money is distributed to your child (beneficiary). Instead of giving all the money outright to an immature 18 year old, the trust can continue to control the funds until the child is better able to make responsible decisions. I normally recommend setting the age of distribution at 25.... but this can and does vary. Remember, a trust gives YOU control ... not the courts. Because there is no court involvement, annual costs are greatly reduced and are a mere fraction of the costs incurred during a conservator proceeding. The trust also eliminates the legal costs necessary for Probate (here estimated at $20,000.00.) The savings in avoiding a Probate AND a Conservatorship (by using a Revocable Trust) is significant. Our examples here demonstrate a reasonable estimate, current value, conservative estimate of $50,000.00. As a result you provide MORE money to your child. AND REMEMBER: Legal fees will increase in the coming years to and the savings you lock in today by setting up a Revocable Trust will only increase as the years go by.
Combine these benefits with an Irrevocable Life Insurance Trust (ILIT) and you can provide significant funds for your children with little or no estate tax. The ILIT replenishes the anticipated amount of estate tax paid by your estate, giving you a "zero sum effect" regarding estate tax liability.
Therefore, by any standard of measure, Estate Planning is
a necessity for those owning life insurance. Estate Planning is a very good investment. The cost of
Estate Planning is minimal compared to the
costs of probate, a conservator proceeding and the federal estate tax.
Again I emphasis, with the use of commonly and readily available life insurance, married couples and single parents can easily create a taxable estate even though they are not considered "rich". From my experience, many people are unaware that their estate could be subject to the hefty Federal Estate tax and have no idea that probate and conservator proceedings can eat up a huge portion of their estate. It's worth your effort to have your situation reviewed now.
Call or email me today!
Jerold R. Gilbert is a Denver Wills Lawyer, a Denver Probate Attorney practicing throughout Colorado with several office locations in the Front Range.
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"Estate Planning Is Wise Planning."
Contact Information
Jerold R. Gilbert, Esq.
9474 Tammy Lane
Parker, CO 80134
720-202-6958 office