Will your life insurance policy have to be used to pay off your final bills and debts? The answer to that question depends, in large part, on the beneficiary designation of your policy.

Policy Payable to Estate

There are two ways for your life insurance policy to be paid to your estate. First, you might actually designate your estate as beneficiary of your policy. Second, you might designate a person as beneficiary who dies before you. If this happens, and you don’t appoint a new beneficiary before you pass away, then depending on your insurance company’s rules, the policy proceeds may be paid to your estate.

When the proceeds of your life insurance are paid to your estate, they’re considered probate property. And, before probate property can be distributed to the heirs or beneficiaries of your estate, your legitimate final bills and debts have to be paid. How is this done? Using probate property. So, in this scenario, your life insurance proceeds (or a portion of them) could be used to pay your final bills and debts.

Policy Payable to Beneficiary

What if you designate a beneficiary, other than your estate, who outlives you and receives your life insurance proceeds? In this situation, your life insurance proceeds are non-probate property. They never go through the probate process, so there’s no requirement that they be used to pay off your final bills and debts.

What About Estate Taxes?

Estate taxes, on the other hand, are a different story. A life insurance policy owned by you at the time of your death – while it might not be probate property – is included in your gross estate for purposes of calculating estate tax. So, there’s a chance that part of the proceeds from your life insurance policy could be needed to pay off any estate tax bill.

The Mendel Law Firm, L.P. is a member of the American Academy of Estate Planning Attorneys.

As a general rule, you can’t pass on your individual debts to your loved ones when you pass away, but what about joint debts or loans for which a loved one has co-signed?  If you pass away, responsibility for paying these debts will fall to the person who signed for the debt along with you.  And if this person is your spouse or one of your children, the consequences when you pass away can be devastating.

The sad fact is that when a loved one is left on the hook for a credit card or loan balance, he or she might be forced to scramble to sell off assets in order to service the debt. Even worse, sometimes a surviving spouse is forced into bankruptcy because there simply are not enough assets to cover the amount owed.

What steps can you take to minimize the impact of debt on your surviving spouse or children? First, make sure you understand which of your debts will be paid from your estate, and which debts will become the personal responsibility of your loved ones.  Your estate planning attorney can help you make this determination.

Second, make sure you leave behind enough life insurance proceeds to enable your loved ones to pay that debt.

Third, if you don’t already have a plan for reducing or eliminating your debt, now is the time to start one. 

Your estate planning attorney can suggest more strategies for helping you reduce the impact that debt may have on your loved ones in the event of your death.

The Mendel Law Firm, L.P. is a member of the American Academy of Estate Planning Attorneys.

Life insurance can be a valuable estate planning tool. An insurance policy allows you to provide for your family after you’re gone, making funds available to cover short-term expenses, paying for your loved ones’ long-term needs, and leaving an inheritance for your children.

But, do you really need it? Not everyone does, and the answer depends in large part on your financial situation and the size and needs of your family. Here are some factors to consider:

• Do you have dependents? Especially for parents of young children, life insurance can be essential. But, even if you don’t have children, life insurance can help you continue to provide for loved ones after you’ve passed away. For instance, if you have other family members or close friends who rely on you for financial assistance, you might want to purchase a life insurance policy.
• Are you a stay-at-home parent? Even if you don’t work outside the home, if you and your spouse have young children, you should consider buying life insurance. Think about all the things you do for your family each day; from caring for children, to shopping and cooking; to cleaning and maintaining the house – and more. If you were to pass away, how much would it cost to hire someone to cover even the most basic of these tasks?
• What are your loved ones’ other sources of income? If you have enough savings, investment income, or other property to provide for your family, then you may not need life insurance – or at least not a large policy.
• Will you need a policy to pay for your funeral? If you’re single and have no dependents – and don’t anticipate having sufficient savings, the most important use of life insurance could be to pay for your funeral expenses. If this is the case, you may want to purchase a small policy.

An estate planning attorney can help you determine how life insurance fits into your overall estate plan.

The Mendel Law Firm, L.P. is a member of the American Academy of Estate Planning Attorneys.

With the estate tax sure to make a comeback next year, estate tax planning is once again at the forefront of many peoples’ minds. And in calculating your gross estate for tax purposes, the IRS includes the value of any life insurance policies you own.

For people whose life insurance policies drive the value of their gross estate into the taxable realm, an Irrevocable Life Insurance Trust (ILIT)can be an effective estate planning tool. How does it work?

You establish an ILIT and name a trustee other than yourself. Then, you transfer ownership of your life insurance policy to the trust, and you name the trust as beneficiary of your life insurance policy.

As part of your trust agreement, you’ll designate trust beneficiaries. These will be your spouse, children, or any other person whom you’d normally designate as beneficiary of your life insurance policy. So, when you pass away, the proceeds of your life insurance policy will go to the trustee, who will then distribute them to the trust beneficiaries according to the instructions contained in the trust agreement.

The ILIT keeps your life insurance policy from being included in your gross estate because, as of the time you transfer the policy to the trustee, you no longer own it. And because the trust is irrevocable, you can’t get the policy back. If you’re married, you can specify in the trust agreement that your life insurance proceeds are to be held in the ILIT after your death and used for the benefit of your spouse during his or her lifetime, and then distributed to your children or other beneficiaries after your spouse passes away. This way, the ILIT avoids estate taxes for your spouse.

The Mendel Law Firm, L.P. is a member of the American Academy of Estate Planning Attorneys.