August 22, 2008
The beneficiaries and back-up beneficiaries named on retirement plans and life insurance policies must be carefully considered and properly designated. A single person without children, for example, may want siblings, nieces, and nephews to be the beneficiaries and not parents. Parents could be elderly and institutionalized, which would mean that any funds left to them would be used to cover long-term care.
A minor child of a single person, if named as a beneficiary, will receive the benefits at age 18. A guardian is appointed by the Probate Court to hold these funds for the benefit of the child. If there is no beneficiary designation, then the balance of the funds (e.g., by an insurance company) are payable to the estate and thus must pass through probate.
Potential Tax Consequences
It is very important to review the tax issues as they apply to beneficiary designations. Most life insurance is not income taxable; however, the death benefit is included in the estate for estate tax purposes. The following are issues that must be considered:
- It is possible that although a person does not currently have a taxable federal estate, (exemption of $2,000,000 in 2008 and $3,500,000 in 2009,) the estate may cross that threshold when the death benefit of employer-owned insurance, group insurance or accidental-death coverage is accepted.
- A term insurance policy should not be owned by the insured because this subjects the policy to estate taxes. It is preferable…
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by: Hyman G. Darling, Esq.