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Select a classmates thread and create a scenario explaining how life insurance can be used to provide for the expenses of a clients estate without creating incidents of ownership or the insurance policy becoming part of the estate.
CREATE THE SCENERIO FROM THIS CLASSMATE THREAD BELOW :
Life insurance is a wonderful gift to give to those that will be left behind in the event of death. The person who owns the policy can choose who receives the benefits of the policy and that person the beneficiary will be free from paying income tax on the proceeds. However the value of the life insurance policy will be added to the gross estate of the decedent (Dalton & Langdon 2016). When planning an estate one should be aware of incidents of ownership. Incident of ownership in a life insurance policy is defined as the ability to exercise any economic right in the policy (Dalton & Langdon 2016). A person that holds an incident of ownership may borrow against it pledge it as collateral or assign it under a contract (Eghrari 2016). This partial ownership of a life insurance policy also gives a person the right to change the beneficiary. Knowing the details of incident of ownership of a life insurance policy is important. If a person has such an ownership in a life insurance policy that covers the life of another that policy will be added to their gross estate as well. Creating a trust is one possible way of avoiding adding costly value to a gross estate.Bradley E.S. Fogel in his article Life Insurance and Life Insurance trust: Basics and Beyond says In order to prevent the proceeds from a policy held by a life insurance trust from being included in the insureds estate the trust must be drafted so that the insured has none of these powers in the policy either individually or as trustee (Fogel 2002). This plan will not work however if the money from the policy goes to the executor of the decedents estate (Fogel 2002). Therefore the trust must be run by someone who will not receive the money in order to avoid the addition to the gross estate. In the end it would be wise to have an estate planner review each case in order to reduce the tax expense inherent with death. Proverbs 10:4 in the International Version says Lazy hands make for poverty but the diligent hands bring wealth. This process of reducing the tax bill that must be paid on ones estate is tedious and daunting work. However in the long run it will keep the money left behind in the hands of those designated to receive it and out of the hands of the government.
References
Dalton M. A. & Langdon T. P. (2016).Estate Planning(9th ed.). St. Rose LA USA: Money Education.
Eghrari M. (2016 August 30).Are Life Insurance Proceeds Subject to Taxes?Retrieved February 12 2017 from forbes.com: http://www.forbes.com/sites/markeghrari/2016/08/30/are-life-insurance-proceeds-subject-to-taxes/#65d34a9b3208
Fogel B. E. (2002 January).Life Insurance and Life Insurance Trusts: Basics and Beyond. Retrieved February 2017 2017 from americanbar.org: http://www.americanbar.org/publications/probate_property_magazine_home/rppt_publications_magazine_2002_02jf_02jf_fogel.html