Estate planning takes expert legal advice

By JAN WARNER and JAN COLLINS Special to the Times
Published April 24, 2007

Q: I am 67 and my wife is 70. On the advice of our insurance agent and financial planner, who is also a family friend, I bought several life insurance policies with face values totaling $700,000. My estate is the beneficiary. I have been having some health problems and also have recently read that I should not own these policies. I am having second thoughts and want to make sure that my wife and children receive the maximum benefit. Can you give me some advice?

A: Because you may have received bad advice from your friend and financial adviser, pay a lawyer now and get comprehensive advice. Disclose all of your assets - or risk your widow paying lawyers and Uncle Sam much more later on. Here's why:

- First, though your wife is older than you, statistically she will outlive you by several years.

- Second, if you leave your insurance to your estate, when you die the policy proceeds will become part of your estate. Depending on how your will is worded, those proceeds may not pass to your spouse estate-tax free, depending on your other assets.

- Third, some folks who don't believe they have taxable estates find - often too late - that life insurance owned by them can create a taxable estate. This year, depending on the value of your other assets and the way in which your will is worded, your assets may be subject to estate taxes that can consume upward of 45 percent of your estate if it exceeds $2-million.

If you had received appropriate advice to begin with, you might have considered establishing an irrevocable insurance trust that would have owned and would have been the beneficiary of your insurance policies. You could have chosen a trustee - a relative, friend, bank, etc. - who would have paid the premiums with money you or your wife gifted to the trust.

At your death, the policy proceeds would have passed - free of estate taxes - into the trust. Then, based on the terms of the trust, the principal or interest could have been paid to your ultimate beneficiaries: your wife, children or others.

Your problem today is that if you transfer your policies into the trust, the proceeds will still be included in your estate if you die within three years from the date of the transfer. If your health is not good, this may not be a viable alternative; instead, you may want to make a gift of the policies to your wife, who would then face the burden of planning.

Our advice: Seek competent legal assistance now. Whatever you do, don't rely on an insurance salesman for legal and tax advice. That's not to say that some agents are not trained in these areas. But you had best check this advice with a lawyer experienced in this field.

Jan Warner is a member of the National Academy of Elder Law Attorneys; Jan Collins is editor of the "Business and Economic Review" published by the University of South Carolina. Write to them on www.nextsteps.net.

[Last modified April 24, 2007, 00:31:41]