Uncovering a Life Insurance Policy for a Deceased Loved One

When and How to get Letters of Testamentary

February 12, 2024

The executor manages assets until the probate process is complete. They also need proof of their authority to do so. The court-issued Letter of Testamentary provides evidence of their authority and explains a recent article from Forbes, “What Is A Letter Of Testamentary?” The article details how this document works and when and how to get Letters of Testamentary.

A decedent’s last will and testament names their executor, who will manage their estate. Their duties include filing probate paperwork with the court, notifying potential heirs and creditors of the probate process and managing assets, including paying bills from the estate’s bank account. The executor is also the one to set up the estate’s bank account. When the estate is nearly completed, assets are distributed to beneficiaries.

Third parties need to know who the executor is. The executor also needs proof of their authority to carry out their job tasks. The letter is a simple document issued by the probate court and typically includes the following information:

The court issuing the letter.
The name and contact details of the executor (also referred to as a “personal representative” of the estate).
That the personal representative was named in the will of the decedent
The date the executor was granted authority to manage the decedent’s estate.

What is the difference between a Letter of Testamentary and a Letter of Administration? A letter of administration can be used during the probate process. However, it serves a different process. The court uses the letter of administration if a person dies without having named a personal representative or executor. The court appoints a person to manage the estate and probate process, and the court then creates a Letter of Administration giving this individual the authority to act.

There is no guarantee or requirement for the court to appoint a family member to serve in this role. This is another reason why having a will that names an executor is essential if the family wishes to be involved in settling the estate.

What if there is no will? Without a will, there is no executor. Someone is still needed to manage the decedent’s assets and take care of the steps in probate. A surviving family member or loved one may open a probate case after death, even when there is no will. This involves filing court documents and attending a hearing. The court will then appoint an administrator, determining who has the desire and ability to serve in the role.

What about assets held in trust? If assets have been placed in a trust, a trustee has been named and is in charge of following the trust’s directions. There is no probate court involvement, which is why so many opt to place their assets in a trust as part of their estate plan. The trust becomes the legal owner of the assets once they are placed in the trust. The trust creator often acts as the trustee during their lifetime and names a successor trustee who takes over in case of incapacity or death. That person has the authority to manage the trust assets and transfer them through the trust administration process without any involvement from the court.

However, if assets were not placed in the trust, they must go through the probate process, and an executor or personal representative will need a letter to manage them.

If you have lost a loved one, or are choosing an executor, ensure you have a complete understanding of when and how to get letters of testamentary. Work with an experienced estate planning attorney familiar with your state’s laws and the court process of probate. If you are interested in learning more about probate, please visit our previous posts.

Reference: Forbes (Jan. 17, 2024) “What Is A Letter Of Testamentary?”

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Texas Trust Law Attorney Zachary Wiewel discusses the Corporate Transparency Act

February 9, 2024

Texas Trust Law Attorney Zachary Wiewel discusses the Corporate Transparency Act

We are always thrilled when one of our attorneys is featured in industry leading publications. Recently Zachary Wiewel was featured in a NAV.com article discussing the increasing importance of the Corporate Transparency Act.

The Corporate Transparency Act (CTA) became effective on January 1, 2021, but has just now entered its implementation phase. It is a federal law that imposes stringent reporting requirements on business entities. Zach discusses who must make the required reporting and what they must report. He also breaks down the potential penalties for non-compliance. This act and its requirements may have a significant impact on those individuals and families that maintain LLCs and other corporate vehicles in their estate planning.

We hope you take a moment to read this informative article.

Texas Trust Law Attorney Zachary Wiewel discusses the Corporate Transparency Act can be found at the link below:

https://www.nav.com/business-formation/navigating-corporate-transparency-act-insights-small-businesses/

If you would like to learn more about Zachary Wiewel, JD, LL.M. (Tax) please visit his bio.

WHY WE DO WHAT WE DO

Meetings with attorneys always seem to deal with the WHAT and HOW of estate planning and probate. At Texas Trust Law we call ourselves The Peace of Mind People®. We want to take a moment and tell you WHY we do what we do.

Here is the WHY of Texas Trust Law: We LOVE taking complex legal concepts and making those understandable to our clients and their advisors so they can take action. That then allows us to bring peace of mind to our clients and their family if they become incapacitated, at death, and when they are concerned about protecting themselves, their wealth, and their loved ones from predators, problematic family members and the IRS.

Life Insurance is vital to Estate Planning

February 7, 2024

Life insurance is vital to comprehensive estate planning. Integrating life insurance policies into estate planning can provide financial security for your heirs and ensure that your estate is distributed according to your wishes. When used effectively, life insurance can solve a range of estate planning challenges, from providing immediate cash flow to beneficiaries to helping cover estate tax liabilities.

Incorporating life insurance into your estate plan requires careful consideration of the type of policy that best suits your needs, whether term life insurance for temporary coverage or whole life insurance for permanent protection. It’s essential to understand the insurance company’s role in managing these policies and ensuring that they align with your overall estate objectives.

Life insurance can play a crucial role in estate planning. It can provide a death benefit to cover immediate expenses after your passing, such as funeral costs and debts, thereby alleviating financial burdens on your heirs. Furthermore, life insurance proceeds can be used to pay estate taxes, ensuring that your beneficiaries receive their inheritance without liquidating other estate assets.

When selecting life insurance for estate planning purposes, it’s important to consider the different types of policies available, such as term insurance for short-term needs and permanent insurance for long-term planning. An insurance agent can be a valuable resource in this process, helping to determine the right policy type for your estate planning goals.

Term life insurance offers coverage for a specified period and is often used for short-term estate planning needs, such as providing financial support to minor children. On the other hand, permanent life insurance policies, like whole life or universal life insurance, offer lifelong coverage and can build cash value over time, which can be an asset in your overall estate.

Life insurance trusts, particularly irrevocable life insurance trusts (ILITs), play a significant role in estate planning. By placing a life insurance policy within a trust, you can exert greater control over how the death benefit is distributed among your beneficiaries. The trust owns the policy, removing it from your taxable estate and potentially reducing estate tax liabilities.

Since the trust is irrevocable, it provides a layer of protection against creditors and legal judgments, ensuring that the life insurance payout is used solely for the benefit of your designated beneficiaries.

When considering life insurance in estate planning, it’s important to evaluate how the death benefit of a life insurance policy will impact your estate’s overall financial picture and the inheritance your heirs will receive. The proceeds from a life insurance policy are typically not subject to federal income tax. However, they can still be included in your gross estate for estate tax purposes, depending on the ownership of the policy.

One of the primary uses of life insurance in estate planning is to provide funds to pay estate taxes. This is especially relevant for larger estates that may face significant federal and state estate taxes. The death benefit from a life insurance policy can be used to cover these taxes, ensuring that your heirs do not have to liquidate other estate assets to meet tax obligations. In planning for estate taxes, working with professionals, such as estate attorneys and tax advisors, is essential to ensure that your life insurance coverage aligns with your anticipated tax liabilities.

Life insurance can offer substantial financial support to your heirs and beneficiaries upon your passing. Whether providing for a spouse, children, or other dependents, life insurance can ensure that your loved ones are cared for financially. This is particularly important in cases where other estate assets are not readily liquid or if you wish to leave a specific inheritance to certain beneficiaries.

When selecting life insurance for this purpose, consider the needs of your heirs, their ability to manage a large sum of money and how the death benefit will complement other aspects of your estate plan.

In conclusion, life insurance plays a vital role in comprehensive estate planning. By carefully selecting the right type of policy, designating appropriate beneficiaries and considering the use of trusts, you can ensure that your estate plan effectively addresses your financial goals and provides for your loved ones after your passing. If you would like to learn more about life insurance and estate planning, please visit our previous posts.

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A Subtrust is a Multi-Tool that serves various Purposes

January 29, 2024

A subtrust is a separate entity created under the umbrella of a primary trust or a will. A subtrust becomes active based on the terms of the trust or will when certain events happen, such as the death of the primary grantor, or creator. Subtrusts are used by estate planning attorneys to help families pass on inheritances and protect their heirs from creditors or issues such as lawsuits or divorce. A Subtrust is a multi-tool that serves various purposes, depending on the beneficiaries’ specific needs and the grantor’s goals.

A subtrust is created as part of a primary trust, often a revocable trust. The primary trust acts as a container for your assets, answering critical questions about who gets them, what they receive, when and how. The subtrust, on the other hand, is like a specialized compartment within this container, designed for specific purposes or beneficiaries. Subtrusts remain dormant within the primary trust until a triggering event, typically the death of the grantor. Upon this event, the subtrust becomes active and, in most cases, irrevocable. This means that the terms of the subtrust cannot be changed.

The activation of a subtrust initiates a process known as trust administration. This process involves naming the subtrust, obtaining a tax ID and setting up a bank account. In addition, an appointed trustee will need to manage the trust assets, including making distributions to beneficiaries, filing tax returns and ensuring that the trust operates according to the trust provisions and the grantor’s intentions.

How Do Subtrusts Work If Created Under a Will?

Subtrusts can also be effectively created under a will, offering a flexible approach to estate planning. The will itself can directly establish these trusts or designate a revocable trust as the beneficiary in what is known as a “pour-over” will. This method ensures that the assets are transferred into the trust upon the grantor’s death.

How are Subtrusts Different from Revocable Trusts?

Subtrusts offer enhanced protection for your assets and beneficiaries. Unlike a revocable trust, which can be altered during the grantor’s lifetime, a subtrust becomes irrevocable upon activation, providing a firmer legal structure. This irrevocability protects the assets from the beneficiary’s creditors and in cases of legal challenges, such as divorce or lawsuits.

What are Subtrusts Commonly Used for?

Subtrusts serve various purposes, depending on the beneficiaries’ specific needs and the trustor’s goals. They can be used to protect beneficiaries who are minors, financially irresponsible, or have special needs. Subtrusts can also safeguard assets from beneficiaries’ creditors, ensuring that the inheritance is used as intended by the grantor.

Subtrusts have many different names and types, each serving a unique purpose in estate planning, as outlined in an article by the American Academy of Estate Planning Attorneys titled Basics of Estate Planning: Trusts and Subtrusts.

How Do Subtrusts Avoid Probate?

A Subtrust is a multi-tool that serves various purposes, but one of the primary reasons is to avoid the lengthy and often costly process of probate. Having assets in a subtrust bypasses the court-supervised distribution process, making things smooth, quick and easy for your family and heirs after your death.

Subtrusts provide a layer of protection for beneficiaries against their creditors or their own irresponsibility. This is particularly important in cases where a beneficiary may face financial difficulties, divorce, legal disputes, or even car accidents. The subtrust provides a shield for the assets to protect them from external claims. If you would like to learn more about trusts, please visit our previous posts.

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Appointing a Trust Protector is a Critical Decision

January 16, 2024

Serving as the trustee of a special needs trust (SNT) can be particularly challenging because it often requires long-term financial management of the trust, while maintaining a good relationship with the beneficiary. Furthermore, because trustees wield great financial power over the trust assets, oversight of their investment and distribution decisions is helpful. Trust protectors can add an additional layer of protection to oversee the management of a trust, supervise the trustee’s actions and remove and replace the trustee when needed. This article delves into why appointing a trust protector is a critical decision that can significantly impact the management of a SNT and guard the beneficiary’s rights.

The Case of Senator Feinstein: A Cautionary Tale

U.S. Sen. Dianne Feinstein’s lawsuit against the trustees of her late husband Richard Blum’s trust, as related in The Hill’s article, “Feinstein accuses trustees of husband’s estate of financial abuse”, highlights one reason why a trust protector may be helpful. Before her death in September 2023, Feinstein accused the trustees of withholding funds and breaching their fiduciary duties.

Through three separate lawsuits, Feinstein claimed that the trustees breached their fiduciary duties to honor the terms of the trust by not making the anticipated distributions of $5 million that were supposed to be placed into her trust in quarterly installments. She argued that the trustees’ inaction in their administration of the trust was intended to benefit Blum’s daughters at her expense, who were slated to receive $22 million each from the trust without Feinstein’s distribution.

For the late Sen. Feinstein, a trust protector may have provided the needed control over the trust assets to leverage the distribution intended by her late husband, who was the settlor. In the context of a special needs trust, where disabled beneficiaries may not be able to supervise their trustees, the role of a trust protector becomes even more critical in managing the trust.

What is a Trust Protector?

Special Needs Alliance explains in the article “Trust Protectors for Special Needs Trusts” that a trust protector is a person appointed to oversee the actions of the trustee and ensure that a trust is administered in line with the settlor’s intentions. Suppose a trustee performs in a manner that is unsatisfactory or even mismanages the trust assets. In that case, the trust protector can be empowered by the trust document to replace that person with a successor trustee. This role is particularly important in special needs trusts, where beneficiaries might not fully understand or be able to manage their financial affairs due to the nature of their disabilities.

How Does a Trust Protector Oversee the Trustee?

A trust protector works alongside the trustee, providing an extra layer of oversight in managing the trust assets according to the instructions in the trust document. They can resolve disputes, guide trustees and ensure that the trust’s administration aligns with the settlor’s intent. Trust protectors are granted various powers, including the ability to review trustee actions, including distribution decisions, replace the trustee and amend trust terms to adapt to changing laws and beneficiary needs. Their primary responsibility is to act in the best interests of the beneficiaries.

How Do Grantors Choose the Right Trust Protector?

Naming a trust protector involves considering their expertise, impartiality and understanding of the beneficiary’s needs. A third party, such as an attorney, accountant, or other professional, can often serve in this role. Family members who may be too challenged by the role of trustee also make a good choice for the trust protector. Selecting a family member who has a good relationship with the beneficiary, understands the nature of their disability and can serve as a good mediator between the trustee and beneficiary is a wise choice.

What Role Do Trust Protectors Play in Special Needs Trusts?

In special needs trusts, trust protectors play a vital role in ensuring that the trust caters to the unique needs of the beneficiary, considering their disability and inability to manage financial affairs. Their role can vary based on the trust agreement terms and state laws. The trust protector can review financial decisions or investments and sometimes force large distributions for purchases, like a house or car, based on the impact on the beneficiary. They can also help the beneficiary understand financial statements and tax documents provided by the trustee.

Is a Trust Protector Also Important to Consider for General Estate Planning?

Appointing a trust protector into any trust is a critical decision. It adds an extra layer of protection and adaptability, ensuring that the trust remains effective and relevant over time. Only a few states have specific laws authorizing and regulating trust protectors. Therefore, it’s essential to work with an experienced estate planning attorney to carefully draft the trust to define the role and anticipate potential issues in exercising the power of the trustee or trust protector.

The Future of Trust Protectors in Estate Planning

As laws and family dynamics evolve, the role of trust protectors is becoming increasingly important in estate planning, offering flexibility and protection for beneficiaries.

Conclusion

Trust protectors offer an essential safeguard in trust administration, especially for special needs trusts. Their oversight ensures that the trust remains effective, adaptable and true to the settlor’s intentions, providing peace of mind for both settlors and beneficiaries.

Trust protectors provide essential oversight and adaptability.
They ensure that the trust’s administration aligns with the settlor’s intent.
Their role is crucial in special needs trusts for beneficiaries who cannot manage their affairs.
Trust protectors are becoming increasingly important in modern estate planning.

If you would like to learn more about trust protectors, and trusts generally, please visit our previous posts.

Photo by Mike Bird

Wise Strategies to manage an Inheritance

December 21, 2023

If you’ve ever read an article about what someone dies with a financial windfall, it’s probably been about a truly life-changing amount of money. A recent article from CNBC, “Receiving an inheritance? Here’s how experts say to handle any windfall,” says the average American inheritance across all age groups and incomes between 2001 and 2019 was just over $12,000. These numbers are from the University of Pennsylvania’s analysis of data from the Federal Reserve’s Survey of Consumer Finances. Whether it is a large sum or more modest, there are wise strategies to manage an inheritance.

The number is skewed down by the vast majority of Americans who don’t receive any inheritance. Looking just at those who did receive an inheritance, the average amount was about $184,000—a healthy amount, but not enough to retire.

You’ll likely fold that money into your current financial plan if you receive an inheritance. Inheritances usually come in three different forms: cash, real estate and investments.

A cash investment is the easiest to handle if you’re not receiving an enormous amount. In 2023, you won’t owe any federal taxes on inherited cash up to $12.92 million. However, depending on where you live, there may be state estate or state inheritance taxes.

Unless you grew up in a palace, it’s not likely you’ll need to deal with the insurance tax limit on a real estate inheritance. With the rule known as “step-up in basis,” you likely won’t owe any tax on property you inherit—not initially, anyway.

The value of an inherited home resets when the owners die. If your parents paid $100,000 for a house and gave it to you when its fair market value is $500,000, and you sold it the next day, you’d owe tax on the $400,000 gain. However, if they die and leave the house to you, the value of the house, known as your basis, is the fair market value of the house—$500,000. If you sold it for this amount, as far as the IRS is concerned, you would not realize a gain. However, there are time limits. There’s a step-up in basis at the time of death, but the estate settlement process can drag on for six or twelve months.

A house can’t be divided up as neatly as cash. If you have siblings, one may want to sell the home for cash. Another might want to rent it out. Another might want to move in.

Get the property appraised as soon as possible and get at least two appraisals. This will make life easier for everyone. If one sibling wants to buy the other’s share of the home, you’ll all know exactly what the shares will be. It also gives you the number when determining when or if to sell it.

Remember, real estate requires maintenance, so until the house is sold, there is an obligation to pay the mortgage, property taxes and upkeep.

Like real estate, any investments inherited in taxable accounts come with a step-up in basis. If your parents paid $10 for Apple stock, you’re inheriting it at its current market value. You can sell it at its basis, and it’s cash. If you decide not to sell it and hang onto the investments, the rules apply as if you bought the stocks at market value, and you’ll owe tax on any gains realized.

The rules are tricky when it comes to inheriting retirement accounts. Plans funded with pre-tax dollars, like 401(k)s and traditional IRAs, are taxable when money comes out for the owners. For heirs, the IRS now gives a ten-year window to empty some of these accounts. If you’re in your peak earning years when you inherit, this can significantly affect your income tax liability.

It is wise of heirs and their benefactors to sit down with an estate planning attorney to map out the best strategies to manage an inheritance. Both benefactors and heirs would benefit in terms of taxes and a smooth transition of assets passing from one generation to the next. It’s something to consider. If you would like to learn more about managing an inheritance, please visit our previous posts.

Reference: CNBC (Oct. 16, 2023) “Receiving an inheritance? Here’s how experts say to handle any windfall”

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Last Will and Testament is different from Living Will

December 14, 2023

A Last Will and Testament is completely different from a Living Will, no matter where you live. Despite its title, “Do you understand the difference between a Living Will and a Last Will in Idaho?” this recent Coeur d’Alene/Post Falls Press article applies to all states.

A last will is the document most people think of when considering estate planning. Often called simply a “will,” this is the estate planning document used to give instructions about what should happen to your assets and possessions when you die and who you want to carry out your wishes in the document.

The will is only effective after you have died.

The person managing your estate after you pass is known as a “Personal Representative” or executor or executrix. Some states only use the phrase personal representative. However, the tasks are the same. Your executor (or your estate planning attorney) files your last will with the county probate court for review, ensuring that the will complies with your state’s laws and getting approval to serve as the executor. This is called “probating the will.”

There are ways to avoid having your entire estate go through probate. An experienced estate planning attorney may recommend trusts and other strategies.

The last will is also used to name a guardian for minor children, which is why every young family needs a last will, even if they don’t have a large estate. Doing so guides the court system and the family about your wishes for your children.

How is the last will different from a living will? It’s a completely different document, serving an entirely different purpose.

A living will is used while you are still alive and serves a very narrow set of circumstances. A living will is used to state what medical treatments you do or don’t want to be administered if you are terminally ill and death is imminent or if you are in what is called a “persistent vegetative state.” This means your body is alive, but your brain is no longer functioning.

In the living will, you can state whether or not you will receive CPR, artificial or natural hydration and nutrition, mechanical respiration and any other means used to keep your body alive. The Living Will is often used with another document, known as a Physician’s Order for Scope of Treatment, or POST, regarding options for medical treatments.

Understanding that a last will and testament and a living will are different is good starting point for your planning. An estate planning attorney can prepare a living will and other documents, including a Power of Attorney and a Health Care Power of Attorney, all of which are needed to protect you while you are living and a last will. If you would like to learn more about a will and living will, please visit our previous posts.

Reference: Coeur d’Alene/Post Falls Press (Nov. 19, 2023) “Do you understand the difference between a Living Will and a Last Will in Idaho?”

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Houses make horrible Wealth Transfer Vehicles

November 16, 2023

Houses make for horrible wealth transfer vehicles. Bequeathing a house can mean passing along financial burdens, red tape, home maintenance responsibilities, potential family conflict and housing market volatility, says Kiplinger’s recent article, “Your Home Would Be a Terrible Inheritance for Your Kids.”

Communication about plans is critical. A study from Money & Family found that 68% of homeowners plan to leave a home or property to heirs. However, 56% haven’t told them about their plans. That will surprise the recipients who may or may not want or be able to service an inherited home.

Suppose you bequeath a house to an heir or heirs. In that case, they’ll have to make an immediate plan for home maintenance, mortgage payments (if necessary), utilities, property taxes, repairs and homeowners’ insurance. Zillow says this can amount to as much as $9,400 annually, not including mortgage payments.

The psychology of the home. Owners often have deep emotional attachments to their homes. Therefore, when people gift their homes to children and heirs, they’re not just giving an asset — they’re endowing them with all the good memories that were made on that property. Emotional connections to the home can be nearly as powerful as a strong attachment to a living being.

Beneficiaries may struggle to make practical choices about the inherited property because of the home’s sentimental value. This emotional aspect can cloud judgment and hinder the effective management and allocation of assets.

The financial burdens and family conflicts for beneficiaries. Inheriting a home entails a range of financial responsibilities that can quickly add up.

Property taxes, insurance premiums, ongoing maintenance costs and unexpected repairs can strain beneficiaries’ financial resources dramatically. If beneficiaries already have their own homes, inheriting an additional property can exacerbate financial burdens and potentially hinder their own financial goals, retirement plans and aspirations. The passing of a family member can also sometimes lead to conflicts among heirs, potentially exacerbating existing fractures in relationships among siblings and other family members. These are just a few reasons why houses make for horrible wealth transfer vehicles.

According to a 2018 study, nearly half (44%) of respondents saw family strife during an estate settlement. Disagreements can cause tension, strain relationships and even result in lengthy legal battles. If you would like to learn more about managing real property in your estate planning, please visit our previous posts.

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How Should you Handle an Inheritance?

November 1, 2023

Let’s say you are a family member who has just been informed that a cherished loved one has passed and you will be receiving an inheritance. Many people are still suffering from grief and may feel overwhelmed with the sudden financial increase – and responsibility. A common question arises for most people. How should you handle an inheritance? As financial advisor Suze Orman said in a recent episode of her podcast, “I think it’s really important that we think about how we invest money today to make the most out of the situation that we have.”

Go Banking Rates’ recent article entitled, “Suze Orman: 3 Things You Must Do If You Receive an Inheritance,” says that the financial guru outlines the next steps to take if you’re receiving an inheritance for the first time and need help figuring out what to do with the money.

Take an Inventory of Your Debt. As tempting as it may be to make a big purchase like going on a trip or buying a big ticket item you’ve been putting off right away, it’s crucial to examine your finances thoroughly. Orman recommends writing down everything that you have, beginning with your debt. Write down credit card debt, student loans, car loans and personal and mortgage debt. Once you’ve categorized all these, write down the average interest rate you are paying on them. This will let you create a plan for paying these off. If it’s a large inheritance, immediately consider eliminating all your debt.
Build Up Your Emergency Savings. After you’ve reviewed and analyzed your debt situation, Orman says having a solid emergency savings account for true emergencies is crucial. These are especially important if your car breaks down or your fridge goes out, and you must pay $400 for repairs. She says you want to rely on something other than a credit card for these scenarios. Therefore, she recommends having a minimum of $1,000 to $2,000 in that account.
Establish your “Must Pay Now Savings Account.” “What must you pay every single month?” Orman asks. “You must pay your mortgage, your rent, your car payment, your insurance premiums, things like that.” She says this is critical to create, particularly if you’ve been living paycheck to paycheck. Allocate eight months of must-pay expenses in a must-pay savings account.

Receiving an inheritance can be an unexpected blessing in many ways, but begs the question of how you should handle the inheritance. Pausing and carefully analyzing the above three situations with a level head is essential.

Keeping up with debt (or slashing it altogether), creating an emergency savings fund and covering your immediate monthly expenses–will all set you on the right track for a healthy financial trajectory. If you would like to learn more about inheritance planning, please read our previous posts.

Reference: Go Banking Rates (Oct. 7, 2023) “Suze Orman: 3 Things You Must Do If You Receive an Inheritance”

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Life Insurance should be Major component of Estate Plan

October 19, 2023

We never know what the future may bring, and waiting too long to investigate life insurance could leave loved ones in a financial bind, according to a recent article from Money, “What Is Joint Life Insurance and How Does It Work?” There are plans ranging from term and whole to individual and joint, and you’ll want to understand how each works before determining which policy best fits your needs. Life insurance should be a major component of your estate plan.

Joint life insurance is a single plan covering the lives of two people with one premium, with the policyholders becoming each other’s beneficiaries or passing benefits to their heirs. Depending on your coverage, these types of life insurance pay out death benefits when one or both of the policyholders dies.

This eliminates the need for separate policies for spouses or partners and minimizes paperwork and the underwriting and administrative costs associated with life insurance policies. This type of plan is often used for business partners, who can use the death benefit to fund the company if one of them dies unexpectedly.

Joint life insurance plans are usually permanent or whole-life policies and stay in effect as long as premiums continue to be paid or until the policy pays out. Investing in joint whole life insurance has certain advantages because it provides long-term certainty.

There are two kinds of joint life insurance-first to die and second to die.

A first-to-die life insurance policy pays a death benefit to the surviving policyholder when the other party dies. This ensures the living policyholder receives a payout, which can be used for living costs if the family’s primary income source is the first to die.

Situations where one spouse doesn’t qualify for life insurance may also make first-to-die life insurance a good idea. Insurance companies may be more willing to insure someone with pre-existing health conditions because there’s only one payout between two policyholders. However, the healthier spouse will most likely incur higher cost premiums with a joint policy than an individual plan.

The first-to-die joint policy terminates once the payout occurs, leaving the surviving spouse or partner without life insurance unless they have an additional individual plan. If the surviving party doesn’t have their own policy, they must purchase a separate policy to ensure their beneficiaries receive a death benefit.

Second-to-die life insurance, or survivorship life insurance, doesn’t pay out until both policyholders die. These plans are often used to leave money for beneficiaries or pay for funeral expenses. A second-to-die policy can be helpful with estate planning because heirs don’t pay estate tax on the death benefits unless they exceed estate tax thresholds.

Determining which policy best suits your family depends on several factors, including how you expect beneficiaries to use the proceeds. Life insurance policies should be a major component of the discussion with your estate planning attorney, and align with your overall estate plan. If you would like to read more about life insurance, please visit our previous posts.

Reference: Money (Sep. 15, 2023) “What Is Joint Life Insurance and How Does It Work?”

Image by Sofia Shultz

Category: Beneficiaries

When and How to get Letters of Testamentary

Texas Trust Law Attorney Zachary Wiewel discusses the Corporate Transparency Act

Life Insurance is vital to Estate Planning

A Subtrust is a Multi-Tool that serves various Purposes

Appointing a Trust Protector is a Critical Decision

The Case of Senator Feinstein: A Cautionary Tale

What is a Trust Protector?

How Does a Trust Protector Oversee the Trustee?

How Do Grantors Choose the Right Trust Protector?

What Role Do Trust Protectors Play in Special Needs Trusts?

Is a Trust Protector Also Important to Consider for General Estate Planning?

The Future of Trust Protectors in Estate Planning

Conclusion

Wise Strategies to manage an Inheritance

Last Will and Testament is different from Living Will

Houses make horrible Wealth Transfer Vehicles

How Should you Handle an Inheritance?

Life Insurance should be Major component of Estate Plan

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