Estate Planning Newsletter

• Legal Separation, Divorce & Inheritance
  Most people are aware that a surviving spouse is usually entitled to inherit all or a large portion of the estate of a deceased spouse. Fewer understand the effect on estates if one spouse dies during a legal separation or after a... Read more.
• Increasing Child Support Payments After an Inheritance
  The federal Child Support Enforcement Act of 1984 requires each state to develop its own set of systematic guidelines for calculating awards of child support. Generally, state child support guidelines are based on the parents’... Read more.
• The Implications of Reproductive Technology on Survivors' Benefits
  Several states refer to children who are born or adopted after the execution of a parent’s will and omitted from the provisions of the testamentary instrument as “omitted” or “pretermitted” children. In the... Read more.
• Overview of the Delaware Series LLC
  Limited Liability Companies (“LLCs”) are a form of business ownership which is a separate legal entity much like a corporation. An LLC is treated like a partnership for tax purposes and like a corporation for liability... Read more.

• Eight Nontraditional Estate Planning Tips For Finance Pros And Their Clients
• Estate planning: How to quit stalling and write your will
• 7 Ways That Beneficiary Designations Can Mess Up Your Estate Plan
• Court decision key for estate planners
• Life Insurance: Beyond Just Estate Planning

When a Marital Settlement Agreement Requires Life Insurance

Many marital settlement agreements require one party to maintain a life insurance policy on his or her life naming the former spouse as the primary beneficiary. While this provides some financial security for the former spouse, it may also result in an adverse unintended tax consequence for the insured spouse’s estate.

For example, if the ex-husband is required to maintain a $1 million life insurance policy on his life, naming his ex-wife as beneficiary, on the ex-husband’s death his ex-wife will receive the $1 million face amount of the policy directly from the life insurance company. If the ex-husband was the owner of the life insurance policy and paid the premiums on the policy, the IRS will include the $1 million face amount of the policy in the ex-husband’s estate for the purposes of calculating the amount of estate tax owed by the ex-husband’s estate. If the ex-husband died in 2013 with a taxable estate of $5.25 million plus the $1 million in life insurance, the inclusion of the life insurance proceeds would result in a $400,000 increase in the estate tax owed.

The foregoing result may be avoided through the use of a tax-sensitive marital settlement agreement and an irrevocable life insurance trust. The ex-husband may still be required to maintain a $1 million life insurance policy with his ex-wife as beneficiary, but the life insurance policy would be owned by the trustee of the irrevocable life insurance trust. The ex-husband may transfer money to the trust for the payment of the premiums. Since the payments are required pursuant to a court order, the payments are not considered taxable gifts. Since the irrevocable life insurance trust, not the ex-husband, is the owner of the policy, the $1 million life insurance policy will not be included in the ex-husband’s estate for the purpose of calculating the estate tax owed.

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