Would this Be Considered an Asset in Her Estate?

[StudentDotCom]

My father created three small life insurance policies way back about 50 years ago where he was the insured and my mother was the beneficiary. However, the policies were held in my mother's name. (My father believed that he was not allowed to be the "owner" in an account where his was the life being insured. Either he was wrong about this, or the laws have changed because I know he could be both owner of the policy and be the one whose life is insured now.) My mother just died. It seems ridiculous to include these policies in her estate because she didn't receive any money from them and it seems wrong to have them be her assets. But on the other hand, it seems ridiculous to NOT include these policies in her estate because she is listed as the owner.

Should these policies be considered part of my father's estate or my mother's estate? And since my father is going to change the ownership of the policies to his name, it would certainly seem unfair for these policies to be counted in her estate when she died but then again counted in his estate when he dies. So does anybody know how this should work?

Note these are tiny policies and the estate issues are only for the state and not federal since they don't have enough in their estates to be affected by federal taxes. So it is not a major issue. But we need to know how to handle it. Thanks for your help.

 

[LGilmore]

Life insurance policies are generally income tax free, but not necessarily estate tax free. Ownership of a life policy for estate tax purposes is like ownership of a home.

IF your dad has an estate tax problem the easiest and smartest way to take the life insurance out of the taxable estate is when he does the beneficiary change for you and your brother, he also does an change of ownership to you and your brother. This takes the life policies out of the estate tax count.

As you said, it may not be necessary to do anything other than a COB as long as his death wouldn't trigger estate taxes. Check with your state as well, because some states have introduced estate taxes as a means of revenue with the prior elimination of a federal estate tax. Again changing the owners of the policies will solve the problem if there is one.

 

[StudentDotCom]

Thanks a lot, LGilmore. But for now, does it need to be included in my mother's estate? My father is the insured, but the account is in my mother's name. So now that we are settling her estate, does this policy need to be included in her estate?

 

[Larry Tew]

In this case only the current cash value would be considered a part of your mom's estate, which may be a non-event.

 

[StudentDotCom]

Thank you for helping.

 

[LGilmore]

The life policies should revert to your dad as owner. As Larry mentioned cash values may need to be counted, what state is all this taking place?

 

[StudentDotCom]

New York. I'm sure that isn't a good thing.

 

[sturgbe]

The policy is her asset but the spouse would be entitled to the Unlimited marital deduction. Thus, no estate taxes owed at her death. (simple rule without knowing how the estate is set up currently).

As far as changing ownership of a policy, beware of the transfer for value. The carrier will need to complete a form 712. It is not always the cash value of the policy that determines the value although this is the case most of the time. In the event the policy is a GUL, this gets tricky. The carrier has to determine the "value" of this policy including the guarantee. You might be surprised at the economic value they assign to the policy. for example, we had a case where the face amount was $2mm and the cash was non exsistent to speak of but the carrier valued the policy at over $400k.

You can always take advantage of the annual gift tax exclusion or annual gifts in the event the gift/transfer of a policy triggers potential taxes...completing form 709.

 

[Larry Tew]

The policy is her asset but the spouse would be entitled to the Unlimited marital deduction. Thus, no estate taxes owed at her death. (simple rule without knowing how the estate is set up currently).

As far as changing ownership of a policy, beware of the transfer for value. The carrier will need to complete a form 712. It is not always the cash value of the policy that determines the value although this is the case most of the time. In the event the policy is a GUL, this gets tricky. The carrier has to determine the "value" of this policy including the guarantee. You might be surprised at the economic value they assign to the policy. for example, we had a case where the face amount was $2mm and the cash was non exsistent to speak of but the carrier valued the policy at over $400k.

You can always take advantage of the annual gift tax exclusion or annual gifts in the event the gift/transfer of a policy triggers potential taxes...completing form 709.

You're way over-complicating this. The transfer of ownership to the insured is one of the five exceptions to the transfer for value rule.