By: Michael J. Greenberg, Esq.
Reprinted with permission from PIA Management Services Inc.
Some agents are under the impression that insurance policies and estate planning documents (Wills, Trusts) are somehow separate and distinct parts of personal planning. In fact, a comprehensive estate plan often integrates insurance products to maximize tax savings, protect government benefits and provide for loved ones. This article discusses three recent market trends and example cases of how estate planning documents and insurance can be used together.
Life Insurance Trusts for Estate Tax Minimization and Business Succession Planning
A recent national trend is for states to either eliminate their Estate Tax or to increase the exemption level (the higher the exemption amount, the fewer estates subject to tax). Meanwhile, the Federal exemption level is currently $5.45 million and is increasing every year based on inflation. This trend means that fewer people will be responsible for paying either State or Federal Estate taxes in the future. However, for those families with taxable Estates above either the state or federal level, or both, developing an estate plan to decrease or minimize the hit of such taxes is still a major concern. In order to pay these taxes, beneficiaries of an Estate could be forced to sell assets of the Estate.
Life insurance within an Irrevocable Life Insurance Trust would help pay for or avoid Estate Taxes and avoid forcing family members from having to sell important assets, especially those that are less liquid such as a family business, investment property or vacation home.
Some believe that all life insurance is not included in the insured's taxable estate. However, that is only true if the policy is owned by an individual other than the insured or by an entity such as an Irrevocable Life Insurance Trust. Ownership by an individual other than the insured results in the insured losing all control over the ultimate disposition of the insurance proceeds at the time of the insured's death as this individual can change the identity of the ultimate beneficiary. In contrast, a life insurance trust allows the insured to design the terms and conditions or to whom and in what manner the life insurance proceeds will be paid at the time of the insured's death. In addition, once inside this Trust, the money can be distributed to beneficiaries outside of Probate, will not be included in the taxable Estate of the deceased, and can provide the liquidity necessary to pay Estate taxes and avoid selling businesses and real estate.
Long Term Care Insurance and Asset Protection Planning
According to the U.S. Department of Health and Human Services, the population aged 65 and over is projected to be 83.7 million by 2050, almost double its estimated population of 43.1 million in 2012. This projected growth will present challenges to policy makers and programs, such as Social Security, Medicare, and Medicaid, which in turn impacts the insurance industry.
Medicaid is the nation's top payer of long-term care services in nursing home facilities. In order to qualify for Medicaid an applicant must remain below certain income and assets levels. Nursing home Medicaid counts all assets that are owned by the applicant when applying for care as well as all assets that have been transferred or given away in the previous five years.
A Medicaid Asset Protection Trust allows the creator of the Trust to receive income from the Trust, maintain control of the assets in the Trust, and continue to live in his or her own residence during the five year period. This is a much better option than transferring assets directly to a loved one or friend, who even with the best intentions could lose the money in a divorce or lawsuit.
In order for people to utilize a Medicaid Asset Protection Trust for receiving nursing home care through Medicaid, any asset placed into the Trust must be in there for the five year look back period. If the Trust creator requires assistance before five years have lapsed, the family will either need to pay out of pocket, which is incredibly expensive, or Medicaid maintains the right to seize assets to pay back the state.
A long-term care policy, which is the only type of insurance which pays for non-skilled custodial care at home or in a nursing home, combined with a Medicaid Asset Protection Trust, will allow the family to withstand the long look back period and receive the care a sick or disabled family member requires. Long-term care policies, though expensive, can save hundreds of thousands of dollars down the line. For those worried about investing thousands of dollars a year for a product they may never use, insurance companies are now offering hybrid Long-Term Care/Life Insurance Policies. These hybrid products can still provide a payout after death for those individuals that do not require Long-Term care during their lifetimes.
Second-to-Die Life Insurance Policies for Special Needs Planning
The Centers for Disease Control and Prevention (CED) has reported that the prevalence of autism spectrum disorder (ASD) among children in the United States has increased by 119.4 percent from 2000 (1 in 150) to 2010 (1 in 68). This increase has major implications for families in providing for disabled loved ones when they are no longer around to support them. One of the most important tools for families to protect loves ones that that are disabled is a Special (or Supplemental) Needs Trusts. These Trusts provide special needs individuals with money and assets that can be used to enhance their lives while at the same time not disqualifying them from the many government benefits that they may be entitled to, including housing. This Trust can provide for education, healthcare, vacations, electronics, and many other life enhancing items and opportunities.
A common worry for parents with a disabled child is providing for the child once both parents pass away. The purpose of a Second-to-Die life insurance policy for the parents is to provide for such child's needs for the rest of the child's life as the insurance does not pay out until both parents are deceased. These policies are less expensive than policies on a single individual's life and therefore an affordable option to use to fund the Special Needs Trust at the specific time when the funds are needed.
Clients considering any of these three options should work with both their insurance agent and Estate Planning, Elder Law, or Special Needs attorney. They need to ensure that their insurance policies and estate planning documents are working together as part of a comprehensive plan that can achieve their goals.
Michael J. Greenberg, Esq. is an Estate Planning, Elder Law, and Special Needs Planning attorney at Keane & Beane, P.C. in White Plains, New York. He is a member of the Trusts & Estates, Elder Law and Special Needs, and Young Lawyers sections of the New York State Bar Association as well as the National Academy of Elder Law Attorneys (NAELA). Mr. Greenberg received his law degree from Emory University School of Law and his undergraduate degree from Williams College. He is admitted to practice law in New York, New Jersey, Connecticut, and Florida. You can follow him on Twitter @MJGElderLaw or email him at firstname.lastname@example.org.