Personal Finance Essentials
Additional Planning Considerations
The Estate Planning Details Most People Miss
Until It’s Too Late
Life Insurance and Estate Taxes
Life insurance death benefits are exempt from income taxes, but without proper planning they may not be exempt from estate taxes. If you own your own life insurance policy – meaning you pay the premiums, direct who the beneficiaries are or borrow against the cash value – the IRS may consider the death benefit part of your taxable estate.
The solution is to name someone else as the owner of your policy, or to establish an irrevocable life insurance trust to hold the policy. Consult a qualified estate attorney before making any changes: if you die within three years of transferring ownership of a policy, the IRS may add the death benefit back into your estate as if the transfer never occurred.
Prenuptial Agreements
If you are considering remarriage – particularly if you have children from a prior relationship – a prenuptial agreement is worth serious consideration. Before remarrying, you and your intended spouse each disclose all assets and obligations, and each waive any rights to the other’s property at death or divorce. This protects your children’s inheritance.
In almost every state, a surviving spouse has the legal right to a portion of your estate, even if your will or trust says otherwise. A valid prenuptial agreement is often the only way to ensure that the assets you have accumulated over a lifetime pass to your children rather than to a new spouse’s family. Prenuptial agreements must be drafted carefully, and each party should have independent legal counsel.
Medicaid and Long‑Term Care Planning
Some families attempt to qualify for Medicaid – the government program that pays for long-term nursing home care – by transferring assets to their children in advance of needing that care. This strategy is known as asset shifting.
Asset shifting is both ethically problematic and federally illegal. Medicaid is funded by taxpayers to help the truly needy, not as a planning strategy for those who have accumulated assets. Furthermore, Medicaid includes a five-year look‑back period: gifts made within five years of filing a Medicaid claim will cause the claim to be denied. Congress has also made it a felony for professional advisors to assist clients in asset shifting schemes.
The practical, ethical and legal solution is long-term care insurance, purchased before care is needed. The average cost of a nursing home is more than $114,000 per year, and neither Medicare nor standard health insurance pays for it. If you wait until long-term care becomes necessary, coverage will be unavailable. Plan now.
Working with the Right Professionals
When you need legal services, seek out specialists. Use a litigator for lawsuits, an estate attorney for your will and trusts, a divorce attorney for family law matters and a corporate attorney for business matters. Relying on a general attorney for complex estate or financial planning decisions is as inadvisable as relying on a general practitioner for specialized surgery.
The combination of qualified legal and financial guidance is the foundation of a sound estate plan – one that protects you during your lifetime, provides for your family after your death and reflects clearly what you intend.