How Life Insurance Beneficiary Designations Play An Important Role In Your Estate Plan by Robert Murray
The Ins and Outs of Life Insurance Beneficiary Designations
How Life Insurance Beneficiary Designations Play An Important Role In Your Estate Plan
Typically, when you think of estate planning, you think of the Last Will & Testament, Durable Power of Attorney, Advance Healthcare Directive, and Living Will. The assumption is that as long as those documents are in place their estate affairs will be in order. What many clients do not realize is that life insurance and other non-probate assets play an important role in their estate plan.
A life insurance policy is considered a “non-probate asset” meaning that the proceeds from the policy can be paid directly to the beneficiary outside of the formal probate process. For this reason, it is vital that primary and contingent beneficiary designations always be up-to-date when formulating an estate plan. The mistake that we see most often with our clients is that a beneficiary may be designated, however, a contingent beneficiary is not chosen. For example, a person takes out a life insurance policy in 2007 and lists their son (an only child) as the beneficiary. No contingent beneficiary is listed. In 2009, the son passes away. In their grief, the policy owner does not contact the insurance company to update the beneficiary designations. A number of years later, the policy owner passes away without a living beneficiary on the policy. By default, the estate would become the beneficiary of the policy thereby forcing the proceeds to potentially be subject to inheritance tax in New Jersey or Pennsylvania depending on the relationship between the decedent and the beneficiary. A mistake can cost beneficiary thousands of dollars in taxes if the owner of the policy does not properly designate a beneficiary.
A person or entity can be listed as a beneficiary of a life insurance policy. For more complex planning, a trust for the benefit of another person can also be listed as a beneficiary. Every company that offers life insurance has their own beneficiary (or change of beneficiary) form along with very specific ways that these forms must be completed. For example, if you decide to name a trust as the beneficiary of the policy, the trust must be specifically designated on the form. Not designating the trust correctly could result a beneficiary receiving the proceeds of the policy outright which could cause a number of issues. Often times the space provided on the form is not sufficient to include the entire trust designation. In those instances, we prepare a supplement to include all the necessary information. Each carrier has their own mandates for submitting supplements so the process will differ depending on your policy.
Ensuring that beneficiary designations are correct and up-to-date with any life insurance policy is a key element of any estate plan. The team at The Murray Firm, LLC will walk you through the process to ensure that your life insurance designations are in-line with your overall estate plan. For more information on estate planning or life insurance beneficiary designations, please call our office at 908-204-3477 or e-mail us at email@example.com.
I did it for my country….
While these six words are simple in nature, they hold a tremendous amount of importance for a Veteran who has served in any branch of the military. Not every person is cut out to be a member of the military. It takes a very unique individual who is willing to sacrifice their time and dedication to ensure the people of the United States of America are safe. At times, this sacrifice entails risking their lives in order to safeguard our freedom.
While there is no way our government can truly thank Veterans and their families enough for their service, the Department of Veterans Affairs has developed a program that helps to supplement income for disabled or sick veterans (or their spouses) who served during specific war time eras. In order to qualify for this type of benefit, first and foremost, the Veteran must have served at least 90 days of active duty service with at least one day of service during a designated war time period. The wartime periods can be found at this link: http://www.benefits.va.gov/pension/wartimeperiod.asp Eligibility can easily be determined by checking the veterans discharge papers, also known as their DD-214.
Once war time service has been established, the VA will then look to the veteran’s (or spouse’s) current health status. In order to qualify for the benefit, the applicant must show that they have certain physical limitations. Those limitations would include being totally and permanently disabled, being a patient at a nursing home or needing a higher level of care at an assisted living facility, or being blind. For example, if your loved one requires assistance bathing, eating, transferring, toileting, or dressing themselves, then he or she would meet the medical requirements for the benefit.
Finally, the VA will look at the applicant’s financial situation. The VA requires the applicant to provide information regarding their income and assets. First, the claimant must have unreimbursed medical expenses that exceed his or her income. Second, the claimant’s assets have to be below approximately $40,000 for an individual or $80,000 for a married person. The primary residence is not considered a countable asset. Based off of that information, the VA will then determine the benefit amount that the applicant is eligible for. Benefit amounts can vary depending on the case, however, there is a potential that the applicant could receive thousands of more dollars per year through this program.
The VA Pension Amounts can be found at the following link: http://www.benefits.va.gov/pension/current_rates_veteran_pen.asp
Combined with the proper long term care plan, the Veteran’s Aid and Attendance benefit is a program that could help to ease the financial burdens that a family often experiences as their loved one grows older. Our team at the Murray Firm is dedicated to assisting as many Veteran families as possible to attain this valuable benefit. With our experience, expertise and a proven record of approvals for this benefit, we are confident that we can guide an eligible applicant through the process.
Your Will be done! Or will it?
There is a common misperception that the Will controls the entire distribution of a person’s assets; however, this commonly held belief is not accurate. The Will only controls the distribution of probate assets. There are two types of assets included in one’s estate: probate and non-probate assets. Probate assets are those that do not have a right of survivorship with a joint owner or a beneficiary designation that directs which beneficiaries are to receive the asset upon death.
For example, if a married couple owns a home as husband and wife, also known as tenancy by the entirety, or a bank account jointly, when the first spouse passes away, his or her half ownership interest in the property or bank account immediately vests in the surviving spouse outside of the probate process. The same applies to a life insurance policy in which there is a named beneficiary. When the named insured passes, the listed beneficiary receives the death benefit outside of the probate process. Jointly owned real estate with a right of survivorship, jointly owned bank or brokerage accounts, life insurance, 401(k), IRA’s and bank or brokerage accounts with a beneficiary designation are all examples of non-probate assets.
So why is this important? Let’s say person A executes the most beautiful, valid Will in the world that leaves all of person A’s assets to a Person B, but Person A owns all of their assets jointly with Person C. Who do you think inherits all of person A’s assets? Yes, you are correct if you said person C. Person B receives nothing upon the death of person A and everything goes to Person C. Once instance in which I often see someone leave assets to another beneficiary unintentionally is when a parent adds a child’s name to their bank accounts so that the child can “write checks” for them. The parent often does not realize that when he or she passes away, the child whose name is on the account will inherit the account balance upon their death along with whatever probate assets will be coming their way under the parent’s Will. As you can imagine, an unintended and inconsistent estate distribution can lead to Will contest, ensuing litigation, and broken family bonds that are often irreparable.
The reality is that the everyday person does not think about or necessarily know the difference between probate and non-probate assets. This is the reason why it is important to work with financial and legal advisors to ensure your estate plan is exactly what you intend it to be.
HOW TO TERMINATE A POWER OF ATTORNEY
As an elder law attorney, I am often asked the questions: “Once I execute my power of attorney may I change it in the future? How can I terminate my Power of Attorney?”
Every adult individual over the age of 18 should have a financial power of attorney (“POA”) in place. A POA allows you, the “principal”, to give someone else, “your agent”, the authority to manage your financial and business affairs. The Agent does not get an ownership interest in your property, but instead a fiduciary duty is imposed on the agent to act in the best interest of the principal. If your Agent fails to act in the principal’s best interest, the principal has the right to revoke the power of attorney and remove the agent from authority. A POA is very flexible in regards to what authority is given, for what time period it is effective, and who gets the authority. The principal decides exactly what powers are granted to the agent and how they will be exercised.
How exactly does the principal terminate a POA? There are actually multiple ways you can terminate the authority granted under a power of attorney: 1) Death, 2) Specify in the document when the POA expires, 3) Execute a new POA, 4) Court Order, 5) Destruction of the Original.
Once the principal passes away the powers granted to the agent under the POA expire and the Will becomes effective. Second, the POA itself can say when the authority ends. If you are leaving the country but need your son to manage your property, hire a landscaper, and pay utilities and taxes, your POA can state: “The enumerated powers are in effect from June 1, 2016 to August 31, 2016.” Third, when the principal executes a new POA, typically the first statement of the POA revokes the authority of the previous document. Fourth, you can petition the court to remove an agent if the principal loses capacity and it can be proven with clear and convincing evidence that the principal is not acting in the principal’s best interest. Fifth, the principal can destroy the original POA.
Once a POA is revoked the principal or new agent should contact all his or her financial institutions to notify them the previous POA has been revoked and a new agent has been appointed. The principal should also notify the former agent in writing so that it is clear he or she is no longer authorized to act on behalf of the principal. An agent who acts in good faith and without knowledge of termination is shielded from liability and any 3rd party who relies on such authority will be protected.
Deciding who will be your agent is a very important decision. Your agent should be someone who you trust implicitly with your affairs and who is capable of making sound financial and business decisions. If you need guidance on making this decision, I recommend you speak to an experienced attorney to help you with the process.
On December 19, 2014, President Obama signed into law “The Achieving a Better Life Experience (ABLE) Act,” which allows for qualified individuals to have a tax-free savings account to help meet their disability needs. On January 11, 2016, Governor Christie signed bills that allowed for qualified individuals to establish ABLE accounts in New Jersey. Unfortunately, it takes the government time to implement such a program so it is looking like these accounts will not be available in New Jersey until the end of 2016.
I believe that ABLE accounts will become a common planning tool for families with special needs individuals because they allow a family to set up a special savings account for disability-related expenses, without the additional administration and costs of setting up a special needs trust. This will allow more families access to a savings vehicle to promote the independence of the disabled individual, while maintaining eligibility for Supplemental Security Income (SSI) or Medicaid.
The ABLE account is the offspring of a 529 Account, which allows a tax free savings vehicle for allowable education expenses. In fact, an Able account is also known as a 529-ABLE Account. Contributions are made with after-tax dollars up to a maximum of $14,000 per year from all sources, but the growth is tax-free. Similar to a standard 529 Account, withdrawals must be for qualified expenses otherwise the gains would be subject to income tax and penalties. An ABLE account may be used for education, housing, transportation, employment training, personal support, health, financial management, legal fees, burial expenses, among others.
In order to qualify for an ABLE account, an individual must have been diagnosed with a disability before the age of 26 AND receiving SSI or SSDI under Title II of the Social Security Act OR has a physical or mental impairment which can be expected to result in death or which has lasted or expected to last for a continuous period of not less than 12 months or is blind AND provides documentation of the diagnosis signed by a physician. Only one ABLE account can be established for a qualified beneficiary.
An individual’s ABLE Account can have up to $100,000 that does not count toward the SSI or Medicaid Resource Limit of $2,000. If the account exceeds $100,000, the individual would no longer be eligible for SSI; however, he or she would not lose Medicaid coverage.
ABLE accounts will be a useful planning tool in conjunction with Special Needs and Supplemental Needs Trusts; however, they will not negate the need for estate planning specifically tailored for special needs individuals. I highly recommend anyone who may have a family member with special needs to speak with an experienced special needs attorney to find out if establishing an ABLE account makes sense for their individual situation.
The Hidden Benefit of Life Insurance
When most people think about the benefits of having a life insurance policy, they are usually thinking about the benefit of financially providing for loved ones in the event of an unanticipated death. What most people do not realize is that a life insurance policy is a tax-efficient way to transfer wealth to your beneficiaries.
Before I go into more detail on the tax benefits of life insurance, it is important to understand the estate tax and inheritance tax. The estate tax is based on the assets a person owns when they die. The federal estate tax exclusion is $5.45 million per individual and $10.9 million with portability for a married couple. New Jersey has an estate tax exclusion of $675,000 per individual and Pennsylvania does not have an estate tax. Less than 1% of estates are subject to the federal estate tax so it is really the state estate tax we are concerned with. The inheritance tax is based on the relationship between the decedent and the beneficiary receiving an inheritance.
The death benefit of a life insurance policy is included in the gross taxable estate of the policy owner. This means that the death benefit increases the amount of the estate tax owed by the policy owner. One way to avoid this consequence is to plan with an Irrevocable Life Insurance Trust, aka ILIT, which excludes the policy from the decedent’s taxable estate, thereby allowing the beneficiaries to receive the proceeds without owing an estate tax or inheritance tax. You should consult with your attorney and insurance advisor to discuss whether an ILIT makes sense for your planning.
Generally, life insurance proceeds are not subject to the inheritance tax, which makes it an extremely useful vehicle to plan in states that have an inheritance tax like New Jersey and Pennsylvania. I’ll provide a New Jersey and Pennsylvania example to illustrate how planning with life insurance can save taxes. In New Jersey, Class A beneficiaries – parents, grandparents, children, grandchildren, etc. – are not subject to the inheritance tax for any inheritance received whether it is life insurance, annuities, bank/brokerage accounts, real estate or any other asset; however, Class C – siblings – and Class D beneficiaries – everyone else – are subject to the inheritance tax if they receive an inheritance other than the proceeds of a life insurance policy. For example, let’s assume a New Jersey man wanted to provide for his longtime girlfriend, a class D beneficiary, after his death. The best way to do so would be through life insurance because she would receive the proceeds inheritance tax free; however, had the man decided to leave his girlfriend real estate or bank/brokerage accounts, the bequest would be subject to the New Jersey inheritance tax. In Pennsylvania, generally only surviving spouses are exempt from the inheritance tax. Everyone else is subject to the inheritance tax in PA, which makes using life insurance as a wealth transfer vehicle even more appealing for all classes of beneficiaries.
If you are concerned about your beneficiaries’ inheritance tax implications, an elder law attorney can plan for this situation and refer you to a trusted insurance professional to prepare the most appropriate, tax-efficient estate plan for your family.
I recently had a phone consultation with a lady who decided to apply for Medicaid for her mother without consulting with an Elder Law Attorney. When her mother entered the skilled nursing facility, she had less than $40,000 remaining in her individual name. The daughter was unaware of the resource limit to qualify for New Jersey’s Medicaid Only program, which allowed her mother a maximum of $2,000 in her name. The daughter believed she could help her mother become eligible by transferring $34,000 of her mother’s money to herself and her children leaving her mother with $6,000 to spend on her care for the next five months – this was a critical mistake!
The problem was that the daughter was unaware of Medicaid’s transfer penalty rules. Medicaid has a 5 year look back to discover if the applicant made any transfers for less than fair market value, aka “gifting,” to ensure only those who are in financial need of Medicaid benefits will qualify. If gifting is discovered, the Medicaid agency assesses a penalty period. The penalty period is determined by adding up the value of transfers and dividing this value by the average cost of nursing home care in New Jersey ($332.50/day or $10,307.50). Once this penalty is assessed, the County Medicaid agency essentially informs the applicant that despite being medically eligible and having only $2,000 remaining in their name, the government will not cover the cost of care for the duration of the penalty period. As you can imagine this can have a devastating effect on an applicant and their family. As for the daughter’s situation, her mother was hit with a 3.5 month penalty period for the transfers made to the daughter and grandchildren. These transfers ultimately cost the family an outstanding bill of close to $100,000. The most unfortunate part of this situation is that it could have been completed avoided if the mother and daughter would have consulted with an experienced elder law attorney when they first considered the need for Medicaid benefits.
An elder law attorney would have sat down with the family and explained every relevant aspect of the Medicaid program including how to become eligible, what care would be covered, how the government would seek reimbursement after the Medicaid recipient passes away, and how the attorney could help to make the application process as smooth as possible. The attorney would be very candid about the family’s situation and if nothing more, the family would have walked away with a complete understanding of the process that lies ahead of them.
Whether you realize it or not, applying for Medicaid benefits is a legal process and one should not go about it without consulting the appropriate legal professional. Anyone who recommends otherwise, is simply doing you a disservice that could have devastating results.
What exactly is an Elder Law Attorney?
As a practicing elder law attorney, I am often confronted with the most obvious questions; What do you do exactly? How are you any different from an Estate Planning Attorney? My response often leaves these individuals enlightened.
Elder law has become a growing specialty in this country over the past 50 years. The main reason for this trend is the increase in life expectancy of our seniors caused by advancements in medicine and healthcare. Recent statistics estimate that the average man will have a life expectancy of 83 years and the average woman will have a life expectancy of over 85 years. This is an unprecedented trend in history. In order to manage this situation, the federal government has taken on the financial burden of long term care for many Americans and enacted statutes to regulate federal assistance. The result is a labyrinth of rules and regulations that are confusing and difficult to navigate. For this reason, the practice of elder law developed to address the range of legal issues facing members of our aging society such as: housing for seniors, managing financial affairs, paying for medical care, government benefits for long term care, and tax issues related to medical care.
The practice of Elder law consists of navigating the healthcare, government benefits, tax and finance laws that affect seniors in the most efficient and effective manner. A good way of understanding the difference between elder law and estate planning is to explain the primary focus of each. Estate planning focuses on what happens to a person’s assets upon their death, while trying to minimize taxes and efficiently distribute the assets to beneficiaries. Elder law focuses on what happens when one continues to live and has increasing care needs while taking into consideration finances and individual circumstances. An elder law attorney must be well versed in estate planning because it is an important part of long term care planning; however, the converse is not true because estate planning does not typically have the same focus on healthcare and eligibility for government benefits.
It is important that you seek out the right legal professional if you are faced with a legal issue in one of the following areas: financial long term care planning, age discrimination in employment, guardianships, veterans benefit planning, Medicaid planning and applications, special needs planning, and estate planning. Don’t try to navigate this maze alone. Seek the professional advice you deserve.
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