Amherst Estate Planning Client Seeks to Avoid Two Costly Estate Planning Mistakes

Assuming life insurance proceeds are excluded from her estate. 

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Many clients believe that insurance proceeds are tax-free.  That is correct as far as income taxes are concerned, but not for estate taxes.  The reality is that the proceeds of all life insurance policies owned by you are included in your estate for estate tax purposes.

As most clients’ approach retirement, they will need to reevaluate their life insurance needs.  For those clients who need to continue life insurance coverage, establishing an irrevocable life insurance trust naming it as the owner and beneficiary of their policies can avoid federal and state death taxes, maintain privacy, avoid probate and related costs and delays, and protect these proceeds from the claims of creditors. While transferring an existing policy provides an estate tax exclusion after a 3-year period has elapsed, having the trust take out a new policy on you will result in an immediate estate tax exclusion and may also reduce premium costs.

Assuming your retirement plan and IRA accounts are covered by her will. 

These accounts must be distributed in accordance with the beneficiary designation on the account.  Many clients fail to name a beneficiary at all, or choose the wrong beneficiary, proving disastrous.

As a general rule, it’s best to name your spouse as the primary beneficiary of your retirement plan and IRA accounts in order to avoid death taxes on the account value and reduce income taxes by allowing a longer distribution period over the spouse’s life expectancy.  Do not make the mistake of naming your estate as a beneficiary, however, since this will accelerate – and substantially increase – the income taxes due on the required distribution, since it must take place within 5 years of your death.

Alternatively, name your children (or your revocable trust – provided it qualifies as a “see through trust”).  Your children/non-spouse beneficiaries can continue to benefit from tax-deferred growth for up to ten (10) years if they roll his or her portion of the IRA into a separate account known as an inherited IRA.

If you are charitably inclined, consider naming one or more of your favorite charities as the secondary, or contingent beneficiary of your retirement plan and taxable IRA accounts.  This eliminates federal and state income and estate taxes on those proceeds for huge tax savings.

For more information on general estate planning and administration, probate or trust matters please contact the attorneys at Welts, White & Fontaine PC.  Please contact us by clicking here or by calling (603) 883-0797. Welts, White & Fontaine is one of Nashua’s largest, multi-practice law firms and serves the legal needs of both individuals and businesses in towns such as Amherst, Milford, Hudson, Brookline, Windham, Hollis, Merrimack, Litchfield, Bedford, Londonderry, Pelham, and, of course, Nashua.

Author: John S. Polgrean, Esq.

This blog is intended for informational use only. The information contained herein should not be construed as offering legal advice or a legal opinion.