The Benefits of Including your Life Insurance Policy in your Estate Plan

Life Insurance, like all assets owned by an individual, should be included in your estate plan discussion and used as a tool for future planning.

At its base level, life insurance is used to provide for those who depend on you, whether that be children, a spouse, or other family members. However, even if you are single with no dependents, life insurance can still be a useful tool to store and access wealth. 

Simple term life policies that have a death payout benefit are usually transferred upon death to a designated beneficiary. That beneficiary is selected by the owner of the policy and once the insurance company has verified the death, they will pay out the policy to the beneficiary. This type of policy does not need much more interaction with your estate plan, with one main exception.

What if you have underage children? If the children are named as beneficiaries, the proceeds of the policy will need to be overseen by the probate court through a guardianship proceeding. This situation can easily be remedied by creating a revocable trust and making it the beneficiary or contingent beneficiary of the policy. This structure would allow your chosen trustee to administer the money for your children under the terms of the trust, and without the need for court intervention, cost, or approval.

Whole or universal life insurance operates a bit differently than a term policy. Under these types of life insurance, the premiums paid to the insurance company provide for the same death benefit as a term policy, but they also accumulate a cash value. This cash value can then be accessed to supplement retirement income or used as a personal loan to the owner, as opposed to using a bank line of credit or a credit card. 

In addition to the issues with underage children, there are other strategies for the use of life insurance that can be a great benefit to your estate. Life insurance is a great source of funds for paying final expenses, debts, and taxes. This type of planning is crucial if the decedent has many assets but little cash.

Wealthy individuals can employ more sophisticated tactics such as creating a dedicated irrevocable trust, called an Irrevocable Life Insurance Trust (ILIT), which would then allow for the owner to pay the premium during their life and then control the distribution when they die by the terms of the trust. This structure has the added advantage of removing the value of the policy from the decedent’s estate for Estate Tax purposes. The number of individuals who will benefit from this strategy is less and less every year though because of the extremely high exemption from the Estate Tax, currently $11,580,000 in 2020.

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Incapacity and what It means for your Estate Plan

In California, drafting a Will, Trust, or alternative Estate Planning document has three basic requirements. First, you must be alive; second, you must put the drafting in writing; and third, you must have the capacity to make testamentary decisions. But what exactly is “capacity to make testamentary decisions?”

Capacity can be a gray area, especially with older individuals, because later in life is usually when dementia and other memory disorders begin to manifest. An important note is that capacity has nothing to do with intelligence, rather, capacity deals with a person’s understanding and ability to know the result of the actions they take. For estate planning, this means they understand the nature and consequences of the decisions they make, and those decisions are made by them alone. Otherwise, they are incapacitated.

The criteria for determining incapacity are listed in California Probate Code Section 6100.5, and to paraphrase the code, here are the requirements:

1.  Understand you are creating a will or trust.

2. Understand and remember what property you own and its condition.

3. Understand and remember your family structure and relationships.

As you can see, the central theme to the above list is that the person creating the documents is that the person must know the result of their actions. They need to know they are creating a will, must know what property will be controlled by the document, and must know if there are any family members not included.

Determining capacity is the first thing estate planning attorneys should assess when meeting with a client.

Often, a simple conversation may reveal that the criteria are met, but in some cases, the attorney will need to delve deeper to ensure the criteria are met. The important takeaway should be that sooner is always better when it comes to creating any Estate Planning documents. This is definitely a case of an ounce of prevention being worth a pound of cure. Documents drafted by individuals who may have an issue with any of the criteria are much more susceptible to challenge in court if the beneficiaries of the estate plan disagree.

If you need an estate plan, contact Tresp Law, APC and ask about your personal property memorandum. We will ask the right questions and help you get the estate plan that is right for you

Navigating Personal Property

Our friends and loved ones inevitably leave some property behind when they pass away. One of the most overlooked categories of property in estate planning is tangible personal property (TPP). TPP is not a bank account or the money held in it, nor is TPP real property like a house or land. Rather, TPP is the “stuff” in our house, the “things” that we live with and interact with every day. Often, this property carries the most emotional value.

Estate planners and their clients often focus on the big-ticket items such as homes, land, bank accounts, and investment/brokerage accounts. Of course these assets would be the main focus of an estate plan because they make up the largest monetary value of the estate. However, monetary value is not always the most important valuation.

TPP is often the most fought over and most sought after property in a decedent’s estate. Imagine if your mother had a wedding ring that had been in your family lineage for four generations. That ring holds an almost incalculable value to the child wanting to continue passing down the ring. Even aside from heirlooms though, it is possible that many items of a deceased family member will be exceedingly valuable to their family when they have passed away. Losing a close family member is traumatic and sometimes a favorite book or blanket used by the decedent is a comforting to the family

Another item that is highly valued by most family members are photographs. Before the rise of the digital revolution there were indeed Yes, it is 2020, and many folks have gone digital, but there are boxes and albums and piles of physical photographs out there to be reviewed, sorted, and distributed. These are also frequently one of the most fought over assets among surviving family members.
 

If you’re wondering about digital assets, those are also some of the highly disputed assets that very often get overlooked. While there may be all those boxes and albums of photos, there are still those who chose to move with the times and stored many of their memories on their social media accounts. Taking these as well as email accounts and important password keepers are the small things that go unthought about all too often

The best way to ensure these items are distributed equitably or in accordance with your wishes is to actually write down what you want to happen. Many Wills or Trusts address personal property all together in a large group with language referencing a memorandum or other writing that defines the distributions. This is smart because it will allow you as the client to review and update the list without needing a formal trust amendment or will codicil, but the problem is that most folks do not take the time to do it.

Take five minutes and think about items you have that others may want. If you already have an estate plan, write down those items and their distribution and keep that the list with your estate planning documents. If you need an estate plan, contact Tresp Law, APC and ask about your personal property memorandum. We will help you think about and draft the document to be included with your estate plan from the start.