1. Are life insurance contracts separable from an estate?
A. Yes. A life insurance contract can be place outside of an individual’s estate with ownership held by children or other beneficiaries.
2. What are the benefits of separating a life insurance contract from an estate?
A. By setting ownership up in this manner, estate tax would be eliminated on the policy if the insured died from an immediate event, such as a heart attack.
3. What are the risks and/or disadvantages of establishing a life insurance contract outside of an estate?
A. The disadvantage to this arrangement is that the beneficiaries who own the policy have access to the policy cash values, which could be a problem if they were irresponsible or experience financial difficulties themselves.
4. Are there other methods of separating a life insurance policy from an estate?
A. Yes. Another way to place the life insurance outside of an individual’s estate is to have the policy inside an irrevocable life insurance trust (ILIT). Technically the life insurance is not owned by your or your family but by the trustee of the trust, and the trustee determines whether taking money out for long-term care expenses is justified.
5. Are there risks involved in placing a life insurance contract in an irrevocable trust?
A. Yes. There is a risk that the IRS (Internal Revenue Service) may recast the transaction if funds are used for your own benefit, however.
6. Is it possible to combine long-term care insurance with estate planning?
A. Yes. These six examples illustrate how:
1 Preserving Step-Up in Capital Gains Basis at Death
2 Transferring Value Out of C Corporations Income Tax-Free
3 Providing Comfort Level for Gift-Givers
4 Third-Party Ownership of Policies
5 Return of Premium at Death Rider
6 Prenuptial Agreements
7. Specifically, what provisions should a revocable living trust contain?
A. Where the situation warrants, the revocable living trust should contain a strong amendment power, which is coordinated with language in the financial durable powers of attorney.
8. Would the language contained within the revocable living trust protect each spouse in the future?
A. With these powers in place the revocable living trust can be amended in the future if required, should one of the settlers of the trust become incompetent.
9. Why have irrevocable trusts and life insurance predominately been used in estate planning?
A. With the life insurance policies being owned by an irrevocable life insurance trust the death benefit is kept out of the estate.
10. What options are available for those who have no need for trusts?
A. For those who have no need for trusts, but still have a compelling need for life insurance a life insurance policy could be purchased with a long-term care rider.
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