Brian Gruss Licensed Insurance Planner

When Planning Wealth Transfer Be Sure to Consider Asset Protection

When planning for your family after you have passed, you should ensure the assets you leave behind are not subject to the claims of creditors.  Life insurance is a unique way to protect your dependents, and many state laws provide protection by exempting insurance proceeds from the claims of creditors.  Some state laws even protect policy cash values during the lifetime of the owner.

Added protection can be achieved by owning a life insurance policy within an irrevocable trust.  A trust can hold life insurance outside the reach of an insured’s creditors.  This will protect the beneficiaries from paying the debt of the insured with the death benefits received, which could leave them with nothing.  A trust can also include “spendthrift” provisions, which may help protect the trust from the claims of the beneficiary’s creditors.  These provisions allow the trustee discretion in providing trust distributions to beneficiaries.

Asset protection is not intended to hide money from creditors, but to isolate and protect valuable assets from being subjected to several events, such as a lawsuit, asset freeze, or bankruptcy.  Basically, asset protection maximizes the allowed exemptions in accordance with state or federal law, while legally protecting assets.

However, a caveat: asset protection is not intended for hiding assets from ex- or current spouses, business partners, legitimate creditors, investors and the like.  In fact, if a person is discovered to be concealing assets from such entities, they will be subject to harsh punishment by law.

A recent use for asset protection has accompanied the increase of identity theft: by keeping certain assets “under the radar,” there is no way to link protected assets by using your personal information, such as your social security number or personal name.  Thus, should you become a victim of identity theft and find yourself without funds while the bank takes months to investigate your case, you will still have the protected assets to live off and will not be severely affected.

There are several different ways to utilize asset protection; even if you are not in debt and never plan to be, you would still find great value in an asset protection policy.

Laws vary between states, so it is important to consult with legal counsel about protections offered in your state.

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Maximize Life Insurance Benefits for Your Heirs

Any financial expert will tell you that if you have a family who depends on your income, a life insurance policy is a must-have. Without life insurance, your family may find themselves in a financial crisis if something happened to you. An effective life insurance plan will ensure that all of your family’s financial needs will be covered in the event of your death—from the monthly mortgage to final expenses to your child’s college education.

Plus, life insurance can offer your family a tax-free death benefit that far surpasses the premiums you pay for the policy each month. However, there’s a catch: if you don’t properly set up your life insurance ownership and beneficiary designations, much of the proceeds from your policy may be severely taxed, leaving your loved ones with very little.

Here are three important tax facts to keep in mind as you structure your life insurance policy:

1. Don’t name yourself or your estate as the beneficiary:

Everything that you own may be subject to federal estate tax when you die, and this must be paid from your estate. However, this tax generally will not be imposed if your property is valued at less than your estate tax exemption amount upon your death. (The federal estate tax exemption amount is $2 million in 2008 and will increase to $3.5 million in 2009.)

However, if you own a life insurance policy with you or your estate named as the beneficiary, this will increase the value of your estate. If this pushes the value of your estate in excess of the exemption amount, the entire death benefit of your life insurance policy could be taxed. Consequently, your heirs could be left with very little or nothing at all.

Therefore, if you think you could be affected by estate taxes, you’re probably better off making someone else the owner and beneficiary of your life insurance policy. For example, you could establish an irrevocable trust as the owner and beneficiary of the policy. On the other hand, you could set it up so that your grown children are the owners and beneficiaries of the policy. Either option will ensure that the proceeds from your insurance policy will not be included in the value of your estate.

1. Name a contingent beneficiary:

If the beneficiary you named on your life insurance policy dies before you, and you die shortly thereafter, the proceeds from your policy may be paid to your estate. Once again, this will raise the value of your estate, increasing the odds of estate taxes and the risk of your life insurance death benefit being fully taxed.

This is why you should name at least two contingent beneficiaries on your insurance policy. That way, if the first beneficiary dies before you, the death benefit from your policy will be paid to directly to the next beneficiary in line, which will avoid the risk of probate and estate taxes.

1. Understand gift taxes:

Any life insurance that you give to a third party other than your spouse may be subject to gift taxes. If you don’t survive this gift by three years, the policy will be brought back to your estate—which once again, increases the value of your estate and with it the risk of estate taxes. Therefore, if you are considering transferring a life insurance policy to a third party, you should consult with a tax or legal professional first to avoid these tax snares.

There’s no question that life insurance and estate taxes can be extremely complex and difficult to understand. That’s why you should work closely with a financial professional to ensure you make the right choices when it comes to setting up your life insurance policy. Otherwise, your heirs may not receive the death benefit they rightly deserve.

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