What Is Considered an Asset in an Estate?

Estate planning attorneys are often asked if a particular asset will be included in an estate, from life insurance and real estate to employment contracts and Health Savings Accounts. The answer is explored in the aptly-titled article, “Will It (My Home, My Life Insurance, Etc.) Be in My Estate?” from Kiplinger.

When you die, your estate is defined in different ways for different planning purposes. You have a gross estate for federal estate taxes. However, there’s also the probate estate. You may also be thinking of whether an asset is part of your estate to be passed onto heirs. It depends on which part of your estate you’re focusing on.

Let’s start with life insurance. You’ve purchased a policy for $500,000, with your son as the designated beneficiary. If you own the policy, the entire $500,000 death benefit will be included in your gross estate for federal estate tax purposes. If your estate is big enough ($12.06 million in 2022), the entire death benefit above the exemption is subject to a 40% federal estate tax.

However, if you want to know if the policy will be included in your probate estate, the answer is no. Proceeds from life insurance policies are not subject to probate, since the death benefit passes by contract directly to the beneficiaries.

Next, is the policy an estate asset available for heirs, creditors, taxing authorities, etc.? The answer is a little less clear. Since your son was named the designated beneficiary, your estate can’t use the proceeds to fulfill bequests made to others through your will. Even if you disowned your son since naming him on the policy and changed your will to pass your estate to other children, the life insurance policy is a contract. Therefore, the money is going to your son, unless you change this while you are still living.

However, there’s a little wrinkle here. Can the proceeds of the life insurance policy be diverted to pay creditors, taxes, or other estate obligations? Here the answer is, it depends. An example is if your son receives the money from the insurance company but your will directs that his share of the probate estate be reduced to reflect his share of costs associated with probate. If the estate doesn’t have enough assets to cover the cost of probate, he may need to tap the proceeds to pay his share.

Another aspect of figuring out what’s included in your estate depends upon where you live. In community property states—Arizona, California, Idaho, Louisiana, New Mexico, Nevada, Texas, Washington, and Wisconsin—assets are treated differently for estate tax purposes than in states with what’s known as “common law” for married couples. Also, in most states, real estate owned on a fee simple basis is simply transferred on death through the probate estate, while in other states, an alternative exists where a Transfer on Death (TOD) deed is used.

This legal jargon may be confusing, but it’s important to know, because if property is in your probate estate, expenses may vary from 2% to 6%, versus assets outside of probate, which have no expenses.

Speak with an experienced estate planning attorney in your state of residence to know what assets are included in your federal estate, what are part of your probate estate and what taxes will be levied on your estate from the state or federal governments and don’t forget, some states have inheritance taxes your heirs will need to pay.

Reference: Kiplinger (Dec. 13, 2021) “Will It (My Home, My Life Insurance, Etc.) Be in My Estate?”

How Is Insurance Used in Estate Planning?

It’s possible that life insurance may play a much bigger role in your estate planning than you might have thought, says a recent article in Kiplinger titled “Other Uses for Life Insurance You May Not Know About.”

If you own a life insurance policy, you’re in good company—just over 50% of Americans own a life insurance policy and more say they are interested in buying one. When the children have grown up and it feels like your retirement nest egg is big enough, you may feel like you don’t need the policy. However, don’t do anything fast—the policy may have far more utility than you think.

Tax benefits. The tax benefits of life insurance policies are even more valuable now than when you first made your purchase. Now that the SECURE Act has eliminated the Stretch IRA, most non-spouse beneficiaries must empty tax-deferred retirement accounts within ten years of the original owner’s death. Depending on how much is in the account and the beneficiary’s tax bracket, they could face an unexpected tax burden and quick demise to the benefits of the inherited account.

Life insurance proceeds are usually income tax free, making a life insurance policy an ideal way to transfer wealth to the next generation. For business owners, life insurance can be used to pay off business debt, fund a buy-sell agreement related to a business or an estate, or fund retirement plans.

What about funding Long-Term Care? Most Americans do not have long-term care insurance, which is potentially the most dangerous threat to their or their spouse’s retirement. The median annual cost for an assisted living facility is $51,600, and the median cost of a private room in a nursing home is more than $100,000. Long-term care insurance is not inexpensive, but long-term care is definitely expensive. Traditional LTC care insurance is not popular because of its cost, but long-term care is more costly. Some insurance companies offer life insurance with long-term care benefits. They can still provide a death benefit if the owner passes without having needed long-term care, but if the owner needs LTC, a certain amount of money or time in care is allotted.

Financial needs change over time, but the need to protect yourself and your loved ones as you age does not change. Speak with an estate planning attorney about your overall plan for the future.

Reference: Kiplinger (July 21, 2021) “Other Uses for Life Insurance You May Not Know About”