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Life Insurance & Your Estate Plan

Your life insurance may mess up your estate plan.

Life insurance is a key element of most estate plans, but an improper, or ill-considered beneficiary designation, can ruin the best of plans.

Upon your “passing”, life insurance proceeds, are paid pursuant to the exact terms of the policy, that is to say, the insurance company provides the proceeds to whoever you designate as the beneficiary of the policy.

If a spouse is named as the beneficiary, and the spouse survives, the life insurance proceeds will be part of your taxable estate BUT the proceeds will qualify for the marital deduction. Therefore, no estate tax will be generated by life insurance proceeds paid to a surviving spouse.

Upon ANY change in your marital status, whether as the result of a divorce, or a marriage, you should contact your insurance agent to make sure your beneficiary designation is still accurate. An “ambiguity” (and a very awkward familial situation) can arise if “my spouse” is designated as the beneficiary and your “surviving” spouse is not the same person who was your “spouse” at the time you bought the policy.

If your spouse does not survive you, or, if you name a child (or children are) as the beneficiary (beneficiaries) on your life insurance policy, there could be significant problems.

In many cases, a properly drafted Will contains provisions for the establishment of a trust for the benefit and protection of beneficiaries, and to prevent the beneficiary from squandering the funds at a young age.

HOWEVER, if your children are individually named (example: Sam and Becky in equal shares) or collectively named (example: “My Children in equal shares”) as the “contingent” or “secondary” beneficiary or beneficiaries (they receive the proceeds if there is no surviving spouse), they will receive the insurance proceeds[1] when they reach “legal” age[2] – REGARDLESS OF ANY TRUST CREATED BY YOUR WILL.

Another problem can occur if there are children who are born AFTER the beneficiary designation. If your beneficiary designation is “My Children: Sam and Becky” as the contingent beneficiaries, what does that mean for Jeff, your son, who is born three years after you bought the policy, but there has been no change of the beneficiary designation?

Avoiding these pitfalls is really quite simple:

First, you need a properly drafted and fully executed will which reflects your intentions; including, but not limited to, any trust to be created to protect your family members.

Second, check with your insurance agent to make certain that the beneficiary designation will be in harmony with your estate planning objectives. This may require you to change your contingent beneficiary designations to: “the Family Trust created by my Will”; or “my Estate” rather than “my children” or naming the children themselves.

Finally, review your Will and beneficiary designations on your life insurance every few years. If you have not reviewed your Will and/or the beneficiary designation on your life insurance in a few years, you should do now.

An improper, ambiguous, or out of date beneficiary designation could cause your life insurance to mess up your estate plan instead of meeting your objectives.

[1] The Proceeds will be held in a conservatorship, until the beneficiary reach the “legal” age. The conservator is a court appointed and supervised individual or bank who invests the proceeds, and makes payments, for the benefit of the “ward”.

[2] “Legal” age (the age when an individual is no longer a “minor”) varies from state to state. In Iowa this is age 18.

The Dynasty Family Business – Part Two

Part One of the Dynasty Family Business covered necessary characteristics a family business needs to become a Dynasty Family Business, and was posted on May 24, 2017.  In this second part, the passage of ownership will be explained.

The “live forever plan” has not yet been shown to be successful.  For a family business to be dynastic, there must be a successful transition of ownership or a passage of ownership.  A lifetime transfer of ownership allows a donor to “see” how the transferee acts as an owner.  This causes the family member who becomes an owner to have some “skin in the game”, which can impact their actions and perceptions.

When the time comes to sell the business their are important factors to keep in mind.  If a shareholder sells stock or membership units, the sale can create a taxable event for the seller.  If a shareholder sells stock or membership units at a discount, the sale can create a gift to the buyer.  The purchase of newly issued stock at a discount may create compensation for the Buyer.  In regards to the purchases and sales of the business, there is no need to transfer the whole company at once.  You could create a series of Options, an installment sale, or you could transfer part of the business during your lifetime and the other part after passing.  These payments could be made over time creating a retirement income.  All sales among family members or sales by the company of newly issued stock/membership units to a family member should be memorialized in a stock purchase agreement.  By doing this, it will provide representations and warranties on which the buyer can rely.  This is critical when the Buyer is paying over a period of time and/or the Buyer has rights to acquire more in the future.  This can be used to refute allegations of a gift, provides evidence of basis for the buyer, and this can promote family harmony by providing evidence of a “real” transaction rather than favoritism.  Until the transferee owns ALL the stock/membership units, there should be a Buy/Sell Agreement whereby the Seller (which could be the Company) can reclaim the stock/membership units in case the transferee dies, becomes disabled, quits or is terminated.  Gifting the company can remove assets from a donor’s taxable estate at a discounted value, could create a future tax problem for the transferee (they take the donor’s basis), and could cause disproportionate gifting (or perceived disproportionate gifting) which could create family discord.

Some choose to transfer ownership post mortem.  An agreement like this may be made during a lifetime and can take effect after passing.  It is important that plans such as this be in writing and in a way to fully express all of the terms of the transaction.  This could be funded in whole or in part by insurance, it can provide liquidity for an estate, and this could “equalize” the estate if there are multiple beneficiaries.  A Will or Revocable Trust can contain provisions to sell the stock/membership units.

When bequests are made, the recipient takes fair market value as “basis” for tax purposes.  Disproportionate bequests can create family discord: “fair” is not always “equal”; and “equal” is not always “fair”.

Absence of a Will or Trust can create problems.  It can lead to a discounted sale or closure of the business, which in turn can cause valuable employees and clients to leave the business, and can cause the termination of a franchise agreement.  When there is no Trust or Will, the Executor/Trustee runs the business until distribution of the stock/membership interest.  In the absence of a family agreement, the Spouse gets 50 – 100{7643a07be85def2dedbecc56bad3bab67e83a7c22b809f3c7a47a1fa73b8911c} and any share that does not go to the Spouse is divided between the children equally.  All beneficiaries are entitled to their pro-rata share of ALL assets of the deceased, including the stock/membership units.   Recipients may not be qualified to make necessary business decisions.

Dynasty Family Business does not just happen.  They have certain characteristics which set them apart form those family businesses which close or pass outside of the family.  To successfully establish a Dynasty Family Business, documentation of the transfer of the ownership of your business within your family is critical.

Please contact our office at 515-727-0900, or at when you are ready to form your business to become a Dynasty Family Business.



Estate Planning Triggers – Part Three – What Causes People to Engage in Estate Planning

The biggest reason that people become engaged in Estate Planning is the occurrence of a “mortality event”.  This can be a serious injury or dramatic illness which they have suffered, or the injury, illness or death of someone close to them.  These would include the death of a parent or the serious illness or death of a close friend.  It is common for individuals who have been seriously injured, or have received a disappointing medical diagnosis, to “put their affairs in order”.

A second reason is a change in your family.  By law, a divorce revokes all bequests to the former Spouse, but commonly a divorce causes people to re-think who they want as beneficiaries, and whether the creation of  testamentary trusts would be efficacious.  The birth of a child or a grandchild can cause people to engage in Estate Planning.  Often, people are concerned about appointing a guardian to raise minor children, or creating a trust to protect minor beneficiaries from being taken advantage of, or squandering assets.

A third reason that people engage in Estate Planning is travel; particularly travel overseas.  While most people travel to reasonably safe places, with the upsurge in terrorist activities in the past several years, people are concerned that if something happens to them while away from home, they want to make sure they have left instructions as to how matters should be handled.

Estate planning is NOT about DEATH.  It is about taking CONTROL.  It is about making sure your wishes are known so that they can be carried out at a time when you cannot act for yourself.  Contact us today to take control by establishing an Estate Plan.

Estate Planning Triggers – Part Two – Why is Estate Planning Important

Absent an estate plan, the Iowa Code governs these matters.

A court will decide who is best suited to distribute your property after you pass.  This may not be the same individual you would choose.  Similarly, the Iowa statute establishes a plan for distribution of your assets which may or may not conform to your wishes.  If there is no Will:

  • A surviving Spouse gets all of the Estate if you do not have children or if all of your children are also children of the surviving Spouse.
  • If you have children who are NOT the surviving Spouse’s children (i.e. a “blended” family) the surviving Spouse get half and the children who are NOT children of surviving Spouse get half.
  • If there is no surviving Spouse and you have no children your Estate goes to your parents (in equal shares).
  • If there is no surviving Spouse, children or parents, your Estate will go to your siblings in equal shares.
  • If there is no surviving Spouse, then your children get everything in equal shares with no opportunity for a trust.  A court would establish a conservatorship for assets which would otherwise be given to minor beneficiaries, and there are significant limitations on actions a court appointed conservator can take without prior court approval.

Similarly, if there is no surviving spouse, a court has to appoint a guardian to raise your children.  This may or may not be the same individual you would choose, and accordingly, they may or may not raise your child in the manner you would want them to.

Estate Planning Triggers – Part One – What is “Estate Planning”?

Estate Planning is the set of declarations of what you want to have happen when you can no longer make decisions for yourself due to death, injury or illness.

Normal Estate Planning includes Wills,Powers of Attorney for Health Care, and Powers of Attorney for Financial Matters.

  • A Will controls the distribution of your property after you pass, and also establishes who would be guardian for children who have not reached “legal age”.
  • A Power of Attorney for Health Care (sometimes called a “medical directive”), appoints someone to make health care decisions for you if you cannot make one for yourself.  This normally includes directions on whether to engage in, or withhold, “life sustaining procedures.”
  • A Power of Attorney for Financial Matters appoints someone to make financial decisions for you if you cannot make one for yourself.  This normally includes the power to sell your property.

Estate Planning can also include trusts.

  • A trust is a series of instructions to a trustee on how to manage the assets entrusted to them.  Those instructions, normally include some direction on how the income of the trust is to be used and when the trust’s assets will be distributed to the specified beneficiaries.
  • Trusts can be created in a Will (called a “testamentary trust”) or can be established separately (called an inter-vivios trust).
  • We commonly include a trust in Wills to protect potential beneficiaries who are minors at the time of execution of a Will (like children) or could be minors at the time of your passing (like grandchildren).

Picking An Executor: Part 1

Estate planning is not about dying. It is about attaining the peace of mind that what you want done will get done when you are no longer there to make your wishes known.

In this and the next few blogs, I’ll go through some common estate planning questions and considerations.

An executor is a person (or a financial institution) appointed in a valid Will who steps in to make sure that:

  • the deceased’s creditors get paid;
  • the estate’s tax obligations are fulfilled; and
  • the assets of the estate get distributed in accordance with the Will.

An executor is court appointed, and, as such, is an officer of the Court. In fact, the executor is required to sign and file an oath that they will faithfully discharge the duties imposed by law according to the best of their ability[1].

Simply stated executor’s duty is to administer the estate in accordance with the law, and the Will of the deceased. This Includes:

  1. Publishing Notice of the opening of the Estate, the time for Creditors to file Claims; and providing notice to a surviving spouse and of the time in which any action must be taken to set aside a Will, or exercise their statutory rights[2].
  2. Preparing and filing an Inventory of all of the assets of the deceased within 9 months of the opening of the Estate[3].
  3. Selling, mortgaging, or leasing property of the estate, if it is in the best interest of the beneficiaries and/or the creditors of the estate to do so.
  4. Paying the debts of the estate[4], which include any taxes (final income taxes of the deceased, Federal Estate taxes, Inheritance Taxes, and Income taxes of the Estate)[5].  HOWEVER, these liabilities are limited to the amount of the estate itself- the executor is not personally liable for the debts of the estate unless the estate is insolvent and they have paid the debts without court approval[6].
  5. Making a Final Report to the Court [7]which includes:  an accounting of all property included in the estate, and their disbursement; a statement that all taxes have been filed and paid; as well as a statement that all debts and charges have been paid.
  6. Distributing the assets remaining after payment of all debts and taxes to the beneficiaries, in accordance with the Will (Note: often bequests to children are to a trust for the benefit of the child until the child reaches certain ages).
  7. Upon satisfactory proof that the estate has paid taxes, creditors, costs of administration (including fees of the executor, the Attorney for the Estate, and charges by the Court itself), AND properly distributed the remaining assets to the beneficiaries, the executor is “discharged” and relieved of any further obligation[8].

Most of our clients chose a surviving spouse, a relative, or a close friend as Executor (in that order). HOWEVER, if you don’t have a Will the COURT will pick one for you.

If we can help you attain the peace of mind that comes from expressing your post mortem wishes contact us via, or at 515-727-0900.

Kreamer Law West Des Moines, Iowa

Our Office

7155 Lake Drive, Suite 200
West Des Moines, IA 50266-2507
Tel: (515) 727-0900 Fax: (515) 727-0939

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