Whole Life Insurance - Transfer Ownership

[savory]

DW and I have 3 whole life policies. I have two in my name that are fully paid and represents 2/3 of the total. DW has one where the dividend is still paying the premium. My policy dividends have recently started to accumulate. As a % of my funds, it is very small right now.

Neither DW nor I require the death benefit as current funds, SS, pension, etc will be sufficient. It has been suggested (not by the insurance company) that we transfer policy ownership to our children who would be named direct beneficiaries upon my death or DW from our respective policies. The goal for this change is to be overprotective of estate tax.

There might be a 3 year look back but even if the inevitable happened in the next 3 years, it would be a break even to where we are today in terms of not changing ownership.

This feels like a good idea to me given we do not need these funds anymore and it would be helpful to my children. Is there anything I might be missing from a tax or estate planning issue?

Thanks

 

[CardsFan]

DW and I have 3 whole life policies. I have two in my name that are fully paid and represents 2/3 of the total. DW has one where the dividend is still paying the premium. My policy dividends have recently started to accumulate. As a % of my funds, it is very small right now.

Neither DW nor I require the death benefit as current funds, SS, pension, etc will be sufficient. It has been suggested (not by the insurance company) that we transfer policy ownership to our children who would be named direct beneficiaries upon my death or DW from our respective policies. The goal for this change is to be overprotective of estate tax.

There might be a 3 year look back but even if the inevitable happened in the next 3 years, it would be a break even to where we are today in terms of not changing ownership.

This feels like a good idea to me given we do not need these funds anymore and it would be helpful to my children. Is there anything I might be missing from a tax or estate planning issue?

Thanks

We have 2 similar policies. Whole life, dividends pay the premium.

I am not sure of the benefit of transferring ownership? Just make the kids the beneficiaries. Or, are you trying to give them the ability to cash out?

 

[savory]

We have 2 similar policies. Whole life, dividends pay the premium.

I am not sure of the benefit of transferring ownership? Just make the kids the beneficiaries. Or, are you trying to give them the ability to cash out?

The main goal is to shield this money from any estate tax. It may not be necessary from an estate point of view but why even take the risk if I can execute this approach. I also like the idea of beginning the inheritance process earlier as it will be more helpful to the DD/DS than to me or DW.

 

[ERD50]

The main goal is to shield this money from any estate tax. It may not be necessary from an estate point of view but why even take the risk if I can execute this approach. I also like the idea of beginning the inheritance process earlier as it will be more helpful to the DD/DS than to me or DW.

OK, but I don't understand the "beginning the inheritance process earlier".

Regardless who owns it, they get the death benefit as beneficiaries. What's the 'early' part?

-ERD50

 

[savory]

OK, but I don't understand the "beginning the inheritance process earlier".

Regardless who owns it, they get the death benefit as beneficiaries. What's the 'early' part?

-ERD50

The early part is when the first one of us passes, insurance money will go to the DS & DD, not to the surviving spouse. It will not be mingled with our assets at all, which I think is the major benefit.

But perhaps you are saying making them the beneficiary directly vs the surviving spouse for the policies is the same thing. If that is enough, it would be easy.

For the first person passing, it may not matter for inheritance tax. I think it will for the second if ownership did not change. So, it would be helpful to make them the beneficiary but not as helpful given the surviving spouse's insurance will be included in the estate. So, I think.

Thanks, your question help me think through this better.

 

[ERD50]

OK, so making them the beneficiary directly would help get it to them earlier (assuming one passes before the other, the most likely situation), and that (hopefully for you and DW) could still be a long time away. And as you say, would not help with any potential estate tax issue.

But look into the tax implications of changing ownership. Seems that would be a "gift", and the current value would go against your Lifetime Exclusion, so would effect your Estate tax in much the same way.

Here's an idea: You don't need the life insurance aspect, so why not cash it in, and "gift" from the proceeds to DS & DD each year. You can gift $15,000 per person a year w/o any impact on the Lifetime Exclusion. Both you and your wife can do that, so that is $15K times two kids times two of you - $60,000 each year removed from the Estate that won't be taxed.

Generally, Life Insurance is not considered a good investment (you pay for the risk protection, which you no longer need), so getting the money in their hands now can be the best financially. They can invest it for the long term, or maybe pay off any high interest loans they have.

Food for thought.

-ERD50

 

[ERD50]

This link explains it (yes, the value is considered a gift, and must be recorded if > $15,000):

https://www.nolo.com/legal-encyclopedia/transfer-life-insurance-decrease-estate-tax-29585-2.html

It points out what I failed to mention - if the cash value is much less than the death benefit, you only got the cash value out of the estate. But you also have to consider the opportunity cost of getting that money in their hands early, if they invest it or pay off high rate loans.

There is no way to know w/o knowing your date of death and the future market returns. At some point (just like retiring), you just have to make your best guess.

-ERD50

 

[N02L84ER]

Could the surviving spouse disclaim the life insurance proceeds to get them to go to the children upon the death of the spouse?

 

[SecondCor521]

Could the surviving spouse disclaim the life insurance proceeds to get them to go to the children upon the death of the spouse?

Maybe. Generally speaking, disclaimers are treated as though the disclaiming person had predeceased the decedent. So if the surviving spouse disclaimed, it would go to the contingent beneficiaries if listed on the policy. If no contingent beneficiaries were named, then the disclaimed amount would go according to the insurance policy terms, which probably would mean that they would end up in the decedent's estate and pass according to the will (or state intestacy laws).

OP, my parents owned a bunch of whole life policies, so they set up an ILIT and transferred ownership of the policies into it about two decades ago. For the policies that still needed premium payments, they wrote a check to the ILIT and sent us kids Crummey letters, waited 30 days, then my sister (eldest and ILIT trustee) used the money to pay the premium.

The point is that proceeds from life insurance policies owned by the decedent are included in the estate for estate tax purposes, but excluded if owned by someone else (either your kids, or an ILIT in our case). If you have a lot of life insurance, or already have an estate near the limit ($11.7M today but scheduled to drop to half that amount in a few years, or earlier if Congress changes the law), or are concerned about the estate limit dropping, or any combination of the above, it's a little bit of hassle for some potentially big savings: the estate tax above the limit is currently 40%.

As far as spouses go, each person has their own estate, so when the first person dies, their estate goes through the estate tax pachinko machine. When the second person dies, the same thing happens. The thing that often saves married couples at the first death is that spouses can generally leave unlimited sums untaxed to the other spouse.

So in the OP's case, policies owned by the first decedent would be in their estate; policies owned by the second decedent would be in their estate.

Regarding @ERD50's idea of just cashing in the policies, that can work too. My opinion after watching these whole life policies for a couple of decades is that they perform about like bonds. So if you like that kind of investment relative to the rest of your assets, then you might keep the policies. But ERD50 is right to suggest that you consider the other uses of that money - equities, loan repayment, or even expenditures like a graduate degree or a vacation home.

Well anyway, the rules get complicated, I'm not a lawyer, and much of what people write about this topic on these message boards is wrong (possibly including some of what I wrote, although of course I don't think so). So as always, consult your own estate planning attorney in your own state and/or authoritative sources such as US estate tax law and IRS forms and publications.