Don’t Own Your Life Insurance
Here’s a simple, free tactic to avoid estate and probate taxes and fees
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Full Transcript below:
00;00;00;00 - 00;00;26;27
Unknown
Welcome back once again to 30 Minute Money, the podcast that delivers action oriented smart money ideas and bite sized pieces here from ROC Vox recording and Production Podcast Studios just outside of Rochester, New York, with my good friend Steve Wershing from Focused Wealth Advisors. Hey, Scott. Hi, Steve. How are you doing? I'm great. How are you? All right.
00;00;27;00 - 00;00;52;02
Unknown
So I was telling you this story about, a friend of mine and what he said that all financial planners are. And I'm not going to tell you because it it it really minimizes your profession. Well, it's just it's just a misunderstood. Just like the topic of today's episode. It's a misunderstanding. Yeah. He said don't don't see a financial planner because all they do is try to sell you life insurance.
00;00;52;02 - 00;01;11;04
Unknown
That's right. Pawn or like pawn life insurance or something, which I don't think you can. Porn. But anyway, probably not. But yes, there will. There are lots of people who claim to be financial planners, but and this one specifically is don't own your life insurance. So I'm interested to know what that means. Yes. You should not on your life insurance.
00;01;11;06 - 00;01;35;00
Unknown
There's no it does not do you any good. You can rent it. No, let's let's just talk about it and then we'll get there. But, so there's a there's this popular myth out there that, life insurance benefits, life insurance proceeds when you pass away our tax free. They are not. And it's important to understand that because a lot of people think that they are now.
00;01;35;03 - 00;02;04;04
Unknown
Here's where the misunderstanding comes from. They are income tax free. So if you if you receive a death benefit from a life insurance policy, if someone who has passed away, you do not have to claim it as income on your 1040 form. But that's not the only kind of tax there is. And depending on the circumstances, there, there could be taxes and cost involved and they don't need to be because people make some very basic mistakes when they put their life insurance strategy together.
00;02;04;10 - 00;02;21;01
Unknown
And that's what we want to talk about, how to avoid that. With a little simple planning, you can just step out of the way and not have that stuff happen now. To, to to do that, we need to talk about a little bit of estate planning, and we need to talk about what kinds of estates there are.
00;02;21;04 - 00;02;41;16
Unknown
And so the simplest, most basic kind of an estate is called a gross estate, which is everything you own when you pass away. You can own it. You can have an incidence of ownership, which means you you own part of it, or you have an aspect of ownership to it. Anything that anything that you own goes into your gross estate.
00;02;41;19 - 00;03;15;29
Unknown
Part of that goes through your will. That's called your probate estate. So when you pass away, some of the stuff that you own will be distributed via your will. That's your probate estate. But your but your your gross estate could be much larger than your then your probate estate. So anything that has a beneficiary and goes around the will, anything that acts as sort of a will substitute retirement plans, insurance policies, anything that's got a beneficiary on it goes direct to the beneficiary, not part of your probate estate, but it is part of your gross estate.
00;03;16;01 - 00;03;34;11
Unknown
What's the what what are some of the problems? What are some of the mistakes you can make when you design your life insurance? Well, one of them is you can have the, you can have the death benefit go through your estate. That's not a good idea. And there's no reason to do that. Well, sometimes there are some reasons to do that and we should talk about those.
00;03;34;13 - 00;03;54;27
Unknown
But if you you know, if if you have your life insurance go into your estate, that's a way of suddenly making your estate a lot bigger, because insurance policies are often for very large numbers. And so, you know, one of the things that we worry about is estate taxes and estate taxes are levied on your gross estate.
00;03;54;29 - 00;04;15;26
Unknown
And it has to be paid out of the, out of what ends up in your estate, the probate estate. It used to be a bigger problem than it is right today. But we it may become a problem in another couple of years. It used to be that, you know, the amount that you could leave, that you could have in your estate before you had to start paying estate taxes was relatively low, but then they kept raising it and raising it and raising it.
00;04;16;00 - 00;04;36;24
Unknown
And back in 2017, they raised it way up. So these days you can have as much as $13 million in your estate before you really have to pay federal estate tax. And so it's not a really huge problem for for most people because they don't have 13 million bucks in their estate, but that's about to drop pretty significantly in a couple of years unless Congress changes the law.
00;04;37;00 - 00;05;01;14
Unknown
When the Tax Cuts and Jobs Act of 2017, sunsets at the end of 2025, that, that estate tax limit will be a lot lower. It's estimated to be around $7 million. So if you leave more than $7 million, you will be subject to federal estate tax. And you want to avoid that any way you can. Because when the federal estate tax kicks in, it kicks in at a pretty high level.
00;05;01;20 - 00;05;25;02
Unknown
You suddenly have to share a pretty large proportion of what's in your estate if you cross over that amount. But let's just leave that aside for a minute, because, again, maybe a lot of people are not even worried about having $7 million in their estate. Okay. Fair enough. What we also have to worry about is state inheritance taxes or state estate taxes, and we want to worry about probate costs.
00;05;25;04 - 00;05;45;16
Unknown
Anything that goes through your will, anything that's processed that way, is subject to probate costs. There are filing fees. You have to pay the executor, the person who distributes all that stuff. You may have to get, bonds to protect against certain things. You have to have. You may have to get things appraised. They're professional fees. And of course, there are attorney's fees.
00;05;45;18 - 00;06;09;03
Unknown
And it's not that really unusual to pay 4005 thousand and $8,000 to probate an estate. And so those are all just expenses that you can avoid. If you can keep stuff out of your probate estate. So first, big, first big lesson here. Don't make your unless you need to. And we'll talk about why in a minute. Don't make your estate the beneficiary of your life insurance policy.
00;06;09;05 - 00;06;30;11
Unknown
The big exception is if there is a trust that you have to fund because you have a disabled child, or because you've got relatives that are just irresponsible with money, you know, there may be a reason why you need to have a trust in your in your will. And you might want to point your life insurance policy toward that trust.
00;06;30;13 - 00;06;49;26
Unknown
If you do, it's probably better to name the trust as the beneficiary instead of pointing to your will, because then the estate can create the trust, and then the money can just go straight there, as opposed to going through the well where you've got to pay the executor, pay the attorneys, pay the probate costs, those kinds of things to go through it.
00;06;49;29 - 00;07;09;26
Unknown
But those are relatively small portion of them. Most of the time, death benefits from life insurance policies will go straight to a beneficiary. And so if you name the beneficiaries directly, you can keep it out of your estate. You can keep you can keep it out of your probate estate. But here's the thing. We talked about the difference between the probate estate and the gross estate.
00;07;09;29 - 00;07;41;02
Unknown
If you die owning a life insurance policy, even if it goes direct to a beneficiary, which means it bypasses the probate estate, it's still part of your gross estate. And so when they value your estate for tax purposes, if you die owning it, it's going to be included in there. And so here's the easy way that you can get around that whenever you, if you have life insurance on your own life, have the beneficiary own it instead of you owning it.
00;07;41;08 - 00;08;00;26
Unknown
So let's say that you and your wife have life insurance policies for the benefit of each other. When one of you passes away, instead of you. Scott, owning the life insurance policy on Scott have you have is a Kelly. Yeah. Have Kelly on your life insurance policy. So she's the beneficiary and she owns it. When you pass away.
00;08;00;26 - 00;08;25;28
Unknown
That death benefit is not in your estate because it's Kelly's asset. It's not yours. And similarly, you should own her policy that so that when she passes away, you get the death benefit, but it's never in her estate. Extremely easy thing to do, extremely simple. And it can keep hundreds of thousands of dollars out of your estate and avoid all of those expenses and potentially taxes.
00;08;26;01 - 00;08;43;26
Unknown
That's that's a very easy solution to this problem. Is it not common to people not know about that? I think a lot of people don't, because I see a lot of policies that are owned by the by the insured. And, you know, a lot of times, you know, again, the estate tax limit is very high. So people just don't think about it.
00;08;43;26 - 00;09;06;23
Unknown
But from my perspective it's just good estate hygiene to, to, you know, keep those little things intact. Because you're going to you can avoid, you know, potential issues. So how would that work? Would I have to take a life or buy a life insurance policy for my wife? And then she would buy one for me and that that way.
00;09;06;25 - 00;09;26;00
Unknown
Yeah. You you you would buy protection on your wife, okay. And she would have to sign as the insured, but you would be the owner, right. And so now there may, there may be times when it's just not practical for the beneficiary to own that. And the other simple thing that you can do to get around that is something called an irrevocable life insurance trust.
00;09;26;03 - 00;09;47;10
Unknown
And so if you have multiple beneficiaries or if it's some other kind of generation skipping kind of a thing, it just it may not be practical to have the beneficiaries on it, but you can actually set up a trust, fund the trust with the premiums and have the trust own the life insurance policy. So again, it stays out of your estate.
00;09;47;13 - 00;10;08;03
Unknown
So the trust is essentially a legal entity. Yeah. That can own, and then and all it does is own life insurance policy. It's all it does to total purpose in life. That is it. And what do you call that? Recurrence. It was, I lit an I lit an irrevocable life insurance trust.
00;10;08;05 - 00;10;42;26
Unknown
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00;10;42;29 - 00;11;04;13
Unknown
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00;11;04;13 - 00;11;33;22
Unknown
So go to Focused Wealth advisors.com/webinars and find out more and sign up right there. Even if you're not planning to retire for the next 5 or 10 years, this information will be critical for you. The longer you have to put the strategies into effect, the more you can accomplish. That's focused wealth advisors.com/webinars to find out more and to sign up today.
00;11;33;25 - 00;11;57;18
Unknown
All right. Take me back to school Steve, what's your 30 minute action item for this subject? 30 minute action item. Check out who owns your life insurance policies. Thanks again for watching and listening. 30 Minute money three minute money. You can find us on all the platforms. Make sure you like and subscribe and share. You can get Ahold of Steve at Focused Wealth advisors.com and me at t rocvox.com for all your podcasting needs.
00;11;57;20 - 00;12;19;11
Unknown
We will catch you on the next episode. Thanks for joining us on 30 Minute Money.