Using Your Insurance: Build Flexibility Into Your Estate Plan
Jim Biesterfelt
Financial planners and estate planning attorneys often recommend life insurance as an estate planning tool for many reasons, including its flexibility. Life insurance, for example, can provide money to finance a child’s education, take care of a spouse, pay off a mortgage, fund a buy-sell agreement, or make a charitable bequest.
Life insurance gives heirs the option of using the proceeds, which are received income tax-free, to cover estate-settlement expenses, rather than having to cash in IRAs or other retirement plans. And, life insurance provides an immediate source of funds to pay federal estate or state inheritance taxes, rather than forcing the family to liquidate assets they might prefer to keep.
WATCH AND ADAPT
Planning for potential estate taxes, however, can be difficult because the laws are constantly shifting. For example, the federal estate tax exemption this year is $2 million, but will climb to $3.5 million in 2009. Then, unless Congress acts, there will be a 1-year repeal of the federal estate tax in 2010, followed by the exemption going to $1 million in 2011.
In addition, states are re-examining their inheritance tax laws, and some states have opted to eliminate any connection to the federal estate tax and impose their own tax. Twenty-four states currently have an estate or inheritance tax. (An estate tax is imposed on the estate before distribution to the heirs, whereas an inheritance tax is imposed on the recipient of the asset.) A dentist’s estate could be subject to a significant tax at the state level, even if no federal estate tax is owed.
The solution? “My recommendation is to watch what’s happening at both the federal and state level, including any state where you own property, plan for the law as it is today, but also build flexibility into your estate plan so it can adapt to changes that might occur in the future,” suggests Denver-based attorney, Stephen P. Rickles.
According to Rickles, one idea for building flexibility into an estate plan is to write a “disclaimer will.” With this type of will, for example, a dentist could leave everything to his or her spouse, anticipating that estate taxes will not be a concern. However, wording in the will could allow the spouse to “disclaim” a portion of the assets into a trust that would be exempt from estate taxes and not be included in the spouse’s estate at his or her death. “The will and trust provide flexibility to protect the estate from taxes should the law change,” Rickles says.
A state’s probate system also can impact estate-planning decisions, including whether to use a will or a living trust. “If your state of residence has adopted the Uniform Probate Code, it has a simplified—and therefore usually less expensive—probate system,” Rickles explains. “In these states, the cost to probate a will may not be a major concern, and a living trust could be an unnecessary expense. On the other hand, a living trust could be advantageous if you live in a state that has a more complicated probate system.”
CONCLUSION
Rickles will address these and other estate-planning issues during a free seminar on October 16 at the American Dental Association (ADA) Annual Session in San Antonio. To attend the event, which is underwritten by a grant from the ADA Insurance Plans, register online at www.ada.org. Or, request a free Estate Planning Kit by calling 888-463-4545 or email ada@gwl.com.
Editor’s note: This article does not constitute legal, tax, or financial advice. Please seek professional input as appropriate to your situation.
Jim Biesterfelt is Vice President of Group Special Accounts at Great-West Life & Annuity Insurance Company. Great-West Life underwrites and administers the ADA Insurance Plans and is the exclusive provider of ADA-sponsored life and disability insurance to ADA members and their families. For more information, call 888-463-4545 or go to www.insurance.ada.org.
