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Estate Planning Newsletter

  • Distribution of a Missing Person's Property
    When an individual dies, their estate must be administered and distributed according to their previously established estate plan (if the decedent executed an estate plan prior to their death) or state intestate succession laws (if the... Read more.
  • What is Probate?
    Probate, a Latin term meaning “to prove the will,” is a court-supervised process that settles a person’s affairs after death. To ensure that the decedent’s final matters and wishes are handled correctly... Read more.
  • Special Powers of Appointment
    What is a Power of Appointment? A power of appointment is the power given by one person to another (referred to as the “holder” of the power of appointment) to designate who is to receive an asset.... Read more.
  • Application of a Gift Tax
    A gift tax is a tax on the privilege of making gifts to others while the taxpayer is still living. The gift tax supplements the estate tax, which taxes gifts made upon death. The gift tax was created to frustrate the attempts of those... Read more.
Estate Planning News Links

Life Insurance Policies and Marital Settlement Agreements

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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