6 Things Seniors Should Consider Before Marrying

Seniors in particular think about marrying with an understandable degree of concern. Maybe your last relationship ended in a divorce, or it’s been a long time since they were married. However, according to a recent article from MSN, “Planning to remarry after a divorce? 6 tips to protect your financial future,” there are some steps to take to make relationships easier to navigate and protect your financial future.

Not all of them are easy, but all are worthwhile.

1.No marrying without a prenup. Everyone thinks of prenups as pertaining to divorce.  They can address divorce, but prenups do much more.  They clarify property in the marriage, such as whether it will belong to one spouse or to the other or both.  Prenups clarify many issues: full financial clarity, financial expectations, the marital rights of the couple and clear details on what would happen in the worst case scenario. This is especially important to putting each of the couples’ respective families at ease as they marry.  Getting all this out in the open before you say “I do” makes it much easier to go forward.

2.Trust…but verify. Estate planning ensures that assets pass as you want. A revocable living trust set up during your lifetime can be used to ensure your assets pass to your offspring. Unlike a will, the provisions of a revocable trust are effective not just when you die but in the event of incapacity. A living trust can provide for the trust creator and their children during any period of incapacity prior to death. At death, the trust ensures that beneficiaries receive assets without going through probate.

3.Estate planning. While you are planning to marry is a good time to check on account titles, beneficiary designations and powers of attorney, both medical and financial. Couples should review their estate plans to be sure planning reflects current wishes. This will go a long way to avoiding fights between the respective families who just recently joined together.

4.Check beneficiaries. Especially after divorce and before a remarriage, check beneficiaries on 401(k)s, pensions, retirement accounts and life insurance policies. If you marry, state law may require you to give some portion of your estate to your spouse or otherwise affect your ownership of property.  In many cases, this can be addressed by a prenup, but you still want to consult an estate planning attorney to guide you through any changes to beneficiaries.

5.Medicaid Planning.    On the negative side, you should consider the likelihood that either party will need help paying for long term care BEFORE marrying.  Medicaid, which is a government benefit that helps pay for long term care, has different eligibility based upon the marital status of the applicant.  Medicaid also expects both spouse’s assets to be used for care which has nothing to do with the prenup.  So, for some individuals, it doesn’t make sense financial to marry where one party will need long term care.

6.Choose fiduciaries wisely. The fiduciaries named in your estate plan are the people who have tasks to fulfill.  This could be a trustee, an executor, an agent and so on.  Consider carefully who should fill these roles as they may have to be between the two families.  Consider the advantages of a corporate trustee, who will be neutral and may prevent tensions with a newly blended family. If an outsider is named as an executor, or to act as a trustee, they may be able to minimize conflict. They’ll also have the professional knowledge and expertise with legal, tax and administrative complexities of administering estates and trusts.

Reference: MSN (Feb. 11, 2023) “Planning to remarry after a divorce? 6 tips to protect your financial future”

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Taxes on Life Insurance?

When people purchase life insurance policies, they designate a beneficiary who will benefit from the policy’s proceeds. When the insured person dies, the policy’s beneficiary then receives a payout known as the death benefit.

Yahoo Finance’s recent article entitled “Will My Beneficiaries Pay Taxes on Life Insurance?” says the big advantage of buying a life insurance policy is that, upon death, your beneficiaries can get a substantial lump sum payment without taxation, unless the amount of the life insurance pushes your estate above the applicable federal estate tax exemption. In that case, your estate will need to pay the tax.

While death benefits are usually tax-free, there are a few situations where the beneficiary of a life insurance policy may have to pay taxes on the lump sum payout. When you earn income from interest, it’s typically taxable. Therefore, if the beneficiary decides to delay the payout instead of receiving it right away, the death benefit may continue to accumulate interest. The death benefit won’t be taxed. However, the beneficiary will typically pay taxes on the additional interest.

So, for example, if the decedent had an insurance policy with a $200,000 death benefit which pays to their daughter at death. The daughter submits a claim after the parent dies and receives $200,736. The $736 is interest generated on the amount of money held by the company post­ death until pay out. The death benefit of $200,000 is not taxable, but the $736 is income taxable as interest, just as though the beneficiary has held the $200,000 in a bank somewhere and generated $736 in interest.

Additionally, the value of the insurance policy is subject to estate tax in most cases. This is true for typical insurance policies where an individual owns a policy on their own life and the proceeds pay out at death (e.g. the $200,000 policy described above). The value of the insurance increases the size of your estate so that if your estate excludes your applicable gift and estate tax exclusion amount (currently about $13,000,000) then your estate will have estate tax to pay.

This obviously doesn’t affect too many people, but many term policies can dramatically increase estate sizes due to their high death benefits.  Some states also have their own inheritance or estate taxes to consider.

Estate planning attorneys, especially when the estate tax exemptions were lower, frequently used life insurance trusts, often called “ILITs” or “Irrevocable Life Insurance Trusts,” to combat this. As the estate tax exemption is currently expected to be cut in half in 2026, these kinds of trusts make sense to use now so that the value of the insurance is removed from your estate in anticipation of a lower exemption.  They work because the client doesn’t have ownership of the insurance policy. It is owned and maintained by the trust without any “incidences of ownership” so that the policy is not considered controlled by the decedent. They will often pay money to the trust which will in turn pay the insurance premiums during life.

I often recommend this to younger clients who are considering life insurance. They may never expect to be estate taxable, but as we don’t know what the future holds, or where politics will take us, we can remove the insurance from their estates now and so not worry about it.

If you want to know more about how life insurance impacts your estate plan, see this article:  https://galligan-law.com/role-of-insurance-in-estate-planning/

As a warning, I’m referring to taxation of life insurance at death. Transferring the policy, withdrawing money or taking a loan from the cash value and surrendering the policy can all have taxable components, so you would want to consult a CPA or attorney on the tax implications before proceeding.

To summarize, beneficiaries usually won’t have to pay taxes on life insurance proceeds. However, some situations can result in a taxable event and in some cases can be planned for in advance.

Reference: Yahoo Finance (Jan. 17, 2023) “Will My Beneficiaries Pay Taxes on Life Insurance?”

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Benefits of Life Insurance in Estate Planning

I’ve had a lot of conversations recently with clients about life insurance in their estate plans.  As an estate planner, I like life insurance.  It provides many benefits in estate planning that are worth considering.  So, I wanted to address some benefits of life insurance.

I’m not doing to talk about whether you should get it per se (other advisors are better suited for that and we can recommend excellent ones), and I’m not going to talk about the financial pros and cons, but instead will focus on the role of life insurance in an estate plan and administration.  For more on how insurance works and the pros and cons, you may want to read Bankrate’s recent article entitled “Life insurance for parents” which exams how life insurance can help your family.

Liquidity:Sometimes clients will ask for very detailed estate plans involving several bequests.  The estate plan is truly their legacy, and they want to express their love and appreciation to many people by giving them a gift in their estate planning.  I think that’s wonderful, but it does present a problem if the estate is illiquid.

For example, a client may have a very healthy estate of $3,500,000 and want to leave $100,000 a piece to 7 different relatives.  That’s fine in theory, but where do you get $700,000 in cash?  That client might have a house, a vacation/beach home, retirement and minimal bank accounts.  The 401(k) might have to (or tax wise should) go to his spouse.  If the house is worth $750,000, the beach home $250,000 and the retirement $2,000,000, you don’t have enough cash left over to give $700,000 to the family, unless you start selling.  With life insurance, you have the cash available.

Estate Tax Planning.This is a bit more complicated, but for clients concerned about estate tax, life insurance is a very useful tool.

The first reason why is similar to the liquidity point.  If you know you are going to pay the estate tax, which is a 40% tax rate on the value of the estate which exceeds your exemption, you may have a rather large check to write.  So, having cash at death provides your beneficiaries with a way to pay the tax without having to liquidate assets at death.

Second, it has a low lifetime value, and most of the value comes post death.  So, if you want to leave more money to your beneficiaries while keeping a smaller amount of assets during your lifetime, you may consider using life insurance in an irrevocable trust.  Here is a useful article talking about how life insurance trusts work.

https://galligan-law.com/the-irrevocable-life-insurance-trust-why-should-you-have-one/

Providing for Beneficiaries with Disabilities: Life insurance is a great income replacement tool, which the Bankrate’s article addresses.  In this particular estate planning context, it is an extremely useful tool for planning for beneficiaries with disabilities.  For example, many couples who have a child with disabilities will provide for that child for as long as they are able.  Their lifetime support provides benefits, both tangible and intangible, for their child that government benefits can’t address.  However, that support may go away when you pass.

Now, that situation is often best addressed by leaving assets to that child in a supplement needs trust, but more importantly, the assets you leave have to be liquid as you know they will be used liberally for the care of your loved one.  So, creating a trust to hold the insurance, such as an inexpensive second-to-die policy, allows the cash to be held in a tax and benefits-efficient manner for your loved one.

Simplicity.Life insurance, in its simplest form, is a contract for a company to give cash to a person you named when you die.  That money is income tax free and doesn’t have complicated rules about how to distribute the proceeds.  For comparison, retirement assets like IRA’s and other qualified retirement funds have complicated rules about to whom they pay out, how long those beneficiaries have to take the money and very specific steps to follow to obtain them.  Retirement assets are wonderful of course because tax deferral allows retirement assets to grow tremendously and provide for your retirement, but are taxed to beneficiaries and don’t flow through your estate plan as easily as life insurance proceeds.

Creditor Protection:  This is not true everywhere, but in Texas life insurance has creditor protection.  So, there are situations where an estate or a beneficiary has creditors, but life insurance can be shielded.  You don’t want to rely on that alone for asset protection planning, but is a helpful feature that cash in a bank account lacks.

If you have life insurance and want to discuss its role in your estate plan, please reach out to your estate planning attorney to learn how it can help you.

Reference: Bankrate (July 26, 2022) “Life insurance for parents”

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