When I first entered the life insurance profession, I never imagined how deeply personal it would become. My journey took a profound turn when I lost my father. Having a full team of advisors by my side, including fellow life insurance specialists, ensured a smooth and comprehensive estate handling process, providing much-needed peace of mind as I mourned my father.
As his health began to decline, I found myself in familiar territory professionally, but now it was personal. Thankfully, his foresight led him to work closely with 3 estate planning attorneys, a money management firm, and life insurance professionals throughout his life. My father’s estate plan included a revocable trust for each spouse, an Irrevocable Life Insurance Trust (ILIT), and life insurance policies. Even with such a comprehensive plan, the expertise of life insurance professionals was crucial in ensuring everything was handled smoothly when he passed away.
Preparing the Estate
In preparing the estate, we implemented several strategies:
Reallocate Assets: Our firm recommended moving all appreciated assets into my father's name and non-appreciated assets into my mother's name for her comfort. Upon my father's death, all assets were moved back to my mother, avoiding the exemption trust, and allowing her to receive a step-up in basis and reducing potential capital gains taxes to the next generation who will now receive a step up in basis at the second death. This strategy also enabled us to diversify concentrated stock positions without paying capital gains.
Utilize Business Losses: We reviewed the tax returns and discovered business losses available to offset IRA income distributions. We liquidated the entire IRA using these business losses, resulting in no tax implications. If these losses hadn't been used before death, they would have evaporated.
Manage Life Insurance Premiums: As my father's health deteriorated, the ILIT had been paying the Universal Life Insurance premiums annually. To avoid overpaying if he died during the policy year, we switched the payments to monthly. At the time of his death, this change saved about half a year’s premium. If this had been a whole life policy or term, the unused portion of the premium would have been returned.
After His Passing
When my father passed, I knew I had to step up during this difficult time. Amidst the grief, several important steps were taken to ensure a smooth transition and honor his careful planning:
Order Death Certificates: Death certificates come with and without the cause of death. It is essential to order multiple copies, particularly those including the cause of death, as they are often required for various legal and financial processes.
Obtain New Tax Identification Number (TIN): You must get a new tax ID number for all the decedent’s Revocable Trust brokerage accounts, which will then become irrevocable trust accounts. This process, which can take several months, is necessary before distributing assets according to the trust documents.
Filing Form 706: This form was filed to create portability of the estate tax exemption between spouses. This step requires detailed documentation of all decedent’s assets, including brokerage statements, appraisals, and valuations of business interests, real estate and personnel property. In our case, only brokerage accounts and checkbook were required to be listed, as all other assets had been transferred to my mother before his death, avoiding the need for additional appraisals. (*If your state has an estate tax, please check the use of portability in your state. Portability is not available in Illinois.)
Handling Life Insurance Claims
Filing life insurance claims required meticulous attention to detail, precise documentation, proper names and trustee signatures, and death certificates, preferably including the cause of death. Insurance checks were made out to the exact ILIT name on file. Although our attorney updated the ILITs, the family wasn't advised to change the checkbook names and accounts, complicating check cashing. Clients often fail to set up ILIT bank accounts, even when instructed. While our ILIT received the insurance proceeds, our ILIT allowed for the return of the assets back to my mother, eliminating the ILIT and enabling another stepped-up basis upon her death. If the funds had remained in the ILIT, any gains would have been taxable to the next generation, with the initial insurance deposits as the cost basis.
Financial Adjustments
After my father's death, ensuring my mother's financial stability became a primary focus. Here's how we tackled two main issues:
Adjust Income: My mother lost approximately $55,000 in annual income at my dad’s death, this income has been recreated by life insurance proceeds placed by our firm.
Asset Protection: With the dissolution of the ILIT, my mother’s assets were no longer credit protected, leading us to purchase an umbrella insurance policy for additional protection. If she ever were to remarry, additional planning may have to be done to protect the assets.
Managing His Affairs
While everyone's situation is unique, here are some essential steps I took after my father's passing to navigate the logistics and legalities. This includes contacting various entities, such as:
Funeral Home: Arrange funeral services.
Estate Planning Attorney: Notify and initiate estate settlement process.
Accountant: Inform for tax and financial matters.
Life Insurance Carriers: File claims and provide necessary documentation.
Social Security: Notify to stop payments and inquire about survivor benefits.
Veterans Affairs: Notify for benefits adjustment and funeral honors.
Medicare Supplement Company: Cancel coverage and request a refund.
Auto and Home Insurance: Remove deceased from policies and request refunds.
Phone Subscriptions: Cancel all subscriptions and services.
Online Accounts: Store passwords to deactivate online accounts.
Ongoing Medications: Cancel any prescriptions and medical services.
Credit Cards: Notify issuers and cancel all cards.
Key Considerations and Recommendations
Reflecting on my family's experience, I want to share some important considerations for estate planning that can help you navigate potential changes and optimize your strategy:
Future Estate Tax Changes: My parents were significantly under today’s estate tax exemption, but estate tax laws can change. This exemption is going to potentially lower on January 1, 2026. Stay informed about these changes and adjust your estate plans accordingly to ensure they remain effective.
Gifts and Basis Adjustments: Gifts to heirs prior to death do not receive a step-up in basis; only assets transferred at death do. For example, with a Qualified Personal Residence Trust (QPRT), the family doesn't get a step-up in basis on the home but can treat it as a rental and complete a 1031 exchange to avoid capital gains.
Inherited Property: When you inherit capital assets like homes, cars, or stocks, the holding period qualifies for long-term gain even if held for less than a year. Using a low basis to transfer assets that will be sold quickly means the beneficiary pays long-term gain on the sale price. If you are under the exemption limits, ensure accurate asset valuations at death and consider any estate taxes imposed by states.
Looking back, my father's experience highlights the invaluable role a trusted advisor team plays. The seamless collaboration between his attorneys, wealth managers, and life insurance specialists ensured a clear understanding of the overall plan and each advisor's specific role. This open communication and coordinated effort resulted in a smooth execution of his wishes, even amidst my grief. Without this unified approach, crucial tasks risk falling through the cracks, causing delays and unnecessary stress for grieving families.
Our proactive approach to estate planning, tax management, and financial decisions ensured our family was supported during this difficult time. By following the tips above and consulting with qualified financial security professionals, you can make sure your family is prepared for whatever comes their way. If you're ready to create a safety net for your loved ones, contact NFP Insurance Solutions today and take the first step toward peace of mind. Our experienced professionals are here to guide you every step of the way, just as they did for me and my family.
Kommentare