Kansas & Missouri Estate Planning

Unclaimed “Death Benefits” Awaiting Claims

To make a broad but warranted generalization, life insurance companies generally don't like to pay out death benefits. You really can't begrudge them.

Fact of Life: Life insurance companies profits only decrease whenever they pay out death benefits.

A recent article in the Wall Street Journal may give you pause regarding whether you might be owed some life insurance money. Why? According to state regulators, as much as one billion dollars is languishing in the form of uncollected life insurance death benefits.

All is right by the insurers, however, as most policies require the beneficiary to file a claim to collect. This occurs when a beneficiary doesn't collect or doesn't know that they are entitled to collect. Unjust or not, this phenomenon has raised regulator suspicions and, out of good will or regulator urgings, some companies have started programs to determine if policy holders have passed and whether claims ought to be filed.

Still, it is a difficult enterprise. The potential for paying erroreous claimes is one of the reasons insurers let beneficiaries make the claims in the first place. So, if you want to ensure that you (or your loved ones) receive all that is owed, consider doing some sleuthing yourself.

The original article has some advice regarding how to find out about a missed policy. An even bigger lesson is for policy holders, and estate planners generally. One billion dollars sits in policies that were meant to care for the policy holders' families, and it's there mostly because it's unknown.

Teaching Point: It is essential, whether your estate planning is elaborate or simple, that you make your family aware of what you own, what your plan is, and how it is to work. Oh, by the way, this especially includes making sure they know the details about any life insurance you may own.

Reference: The Wall Street Journal (December 31, 2011) "Are You Owed Life Insurance?" 

Life Insurance: What You Need To Know

Oftentimes described (quite accurately) as the "Swiss army knife" of estate planning, life insurance really isn't as frightening or complex as it seems.

Life insurance is a fantastically useful and flexible estate-planning tool that can provide income-tax-free security for your loved ones. It can also provide liquidity to pay estate taxes, especially if your estate largely consists of assets such as real estate or a closely held business that you may be reluctant to sell to raise cash. (If the policy is owned by an irrevocable trust, the insurance payout can avoid estate taxes too). Bottom line: I have never heard a widow complain about the life insurance her deceased husband had.

Despite its wonders, most of us really don't like insurance of any type. You pay and you pay and you pay premiums. If nothing else, it means confronting and directly dealing with risk. And life insurance can be an especially touchy subject, since it means dealing with the topic of death (usually our own). Still, life insurance is neither as scary nor as difficult as we may think. Fortunately, the Wall Street Journal recently provided a basic rundown for the wary on how to go about life insurance.

So, why is life insurance such a powerful estate planning tool? Because it is waiting to provide a potentially massive injection of liquidity into your estate at your time of death. It can mean the necessary income to provide support for your family, as well as pay off any debts, taxes and expenses you may leave behind. In addition, cash is king when it comes to paying estate taxes. This can be critical when your estate value is tilted toward illiquid assets (e.g., a family business).

Still, the type and amount of life insurance that is right for you will depend on your own unique circumstances and the purpose of the insurance.

Before you begin wading into the life insurance analysis process, be sure to take a look at the Journal's rundown of the basics. Then, make sure you get the advice of a qualified insurance professional to help you.

Reference: The Wall Street Journal (October 15, 2011) "Need to Know: Life Insurance 101"

Mixing Metaphors... Life Insurance/Long-Term Care Insurance Combos

One of the common complaints about Long-Term Care insurance* is that you pay and you pay and you pay premiums... and never collect benefits. Right? Well, that is the way insurance is supposed to work, if you are fortunate not to have a claim. Still, some forms of risk management offer an apparent no-lose proposition. So it is with some rather creative combination Life Insurance - Long-Term Care Insurance available to consumers.

Sales of insurance policies that combine long-term-care with other forms of insurance are booming. But before buying, it's important to understand the possible drawbacks.

Insurance, in its many forms, has been referred to as the Swiss Army Knife of estate planning – providing cash just when needed, and for pennies-on-the-premium-dollar. you transfer a risk you cannot afford (i.e., a lengthy stay in a long-term care facility) for a sum certain you can afford
A solid life and estate plan may include long-term care insurance for advanced health care needs, life insurance to cover at least your final expenses, and even annuities to guarantee income. Rather than deal with two or three separate policies, though, there is a growing trend toward the use of combined insurance policies, but before buying, a recent Wall Street Journal article warns of potential drawbacks.

Combined insurance policies come in a few shapes and sizes, but are generally based around long-term care insurance combined with a life insurance policy or an annuity. In the event that the policy holder requires long-term care, the funds come from the other component(s). Extra long-term care protection can often also be purchased.

These policies may be a good deal for some. As the Journal points out:

They allow those who don't use their long-term-care coverage to recoup money spent on premiums. Because many combined policies guarantee coverage at a set price, they also offer policyholders a way to hedge against the premium increases that have plagued holders of conventional long-term-care policies. Another benefit: For those in poor health, a combined policy may be easier to obtain.

Nevertheless, since the policies are combined, using one policy effectively nullifies the other. There will either be no death benefit or no more steady income in the respective policies if the policy holder needs long-term care.

Further, there may be other complications with a combined policy, depending upon your specific situation. Finally, these combined policies can be quite expensive.

You can learn more about long-term care insurance in the Long-Term Care Practice Center on our website. Be sure to sign up for our free e-newsletter to stay abreast of issues like these that could affect you, your loved ones and your estate planning.

Reference: The Wall Street Journal (July 31, 2011) "‘Combined’ Insurance Policies Grow"

Beware: Medicaid Disqualifying "Life Insurance"

Not all life insurance is the same, and that's not just an old sales trick to up-sell a client. In the eyes of Medicare and Medicaid, not all life insurance is truly "life insurance" – and that can be a reason to deny benefits.

Consider the case of Lind v. Maxwell-Jolly (Cal. Ct. App., No. C061912, July 28, 2012) (unpublished), as discussed here on ElderLawAnswers.com, where an endowment life insurance contract became an impediment to Medicaid benefits.

Mary Lind, a nursing home resident, applied for Medicaid benefits and then purchased a "Single Premium Pure Endowment Life Insurance Contract" for $92,000. Here's how the contract works: If she were still alive at the contract maturity date five years hence, then Ms. Lind would be repaid her premiums plus dividends. Of course, the state and two appeals courts weren't buying it.

Since the contract specifies that it will repay Ms. Lind in her lifetime, it is not life insurance. Further, the contact didn't even specify the amounts to be paid out to beneficiaries upon her death. Accordingly, the court held that the contract is more akin to a legal trust and, therefore, the funds invested in it are available funds precluding her from Medicaid.

Teaching point: Not all "life insurance" is life insurance. As in all things financial, and legal, look before you leap.

Reference: ElderLawAnswers.com (August 1, 2011) "Endowment Life Insurance Contract Is Available Asset for Medicaid Availability Purposes"

Do Your Heirs Have Feathers, Fins Or Fur?

So, you have made estate plans to minimize taxes and distribute (and, hopefully, protect) your earthly assets to your loved ones. Excellent! Oh, by the way, there is one last detail you may not want to overlook. Have you made arrangements for any "heirs" who have feathers, fins or fur?

According to a recent article in the Wall Street Journal, there are approximately 400,000 pets each year looking for new homes because their owners die. Pets are part of the family. As a result, it only makes sense to provide for them when planning your estate.

Depending on your circumstances and the needs of your pet(s), such planning may range from informally entrusting their care to another family member to formally establishing a "Pet Trust," as authorized in 46 states and the District of Columbia.The Michigan State University College of Law has an Animal Legal & Historical Center, if you want to review this body of law and specific state statutes (e.g., K.S.A. 58a-408, Kansas Uniform Trust Code).

So, how do you create a Pet Trust? You can elect to plan under either a Last Will and Testament or a Revocable Living Trust. In any event, generally there are four parties to any Pet Trust: the trustee, the caretaker, the pet (one or more) and the remainder beneficiary.

The trustee may be an individual, a corporate fiduciary, or both. As with most choices, there are advantages to each approach. The same is true with the caretaker.  Unless your trustee and caretaker wear blue leotards with an "S" emblazoned on their chest, remember to appoint successors in case either your primary trustee or caretaker is unwilling or unable to serve.

Practical pointer: It may be prudent to ensure that the trustee and the caretaker are not one in the same. In other words, make allowances for human nature when planning for your members of the animal kingdom. For example, if the trustee is compensated as long as the pet lives, then your pet may have "heroic measures" applied to extend its life. [In fact, there have been reported instances where pets have died, only to be replaced by look-alikes so the trustees/caretakers continued to receive compensation for their services.] On the other hand, if your trustee is the "remainder beneficiary" (e.g., typically family members, friends or charities) of any proceeds remaining after your pet's death... well, you get the idea.

Remember to provide sufficient "funding" for the lifelong care of your pet. Just how much of a nest egg do you need to set aside to fund the future care of your pet? The amount depends on two variables – the life expectancy of your pet and the projected cost of care.

Your veterinarian is an excellent resource when estimating the life expectancy of your pet, just as your check register is an excellent resource to calculate the actual cost of annual care. [Sidebar: My good friend Jennifer Campbell Goddard (an owner of horses... or does one really "own" horses?) informs me that, according to her check register, horses eat a lot and every veterinarian visit costs a small fortune.] Once you know the likely remaining life expectancy of your pet and the historical cost of care, simple multiplication is all that remains and... viola!

Now that you have calculated the amount of trust property required to provide the appropriate nest egg for your pet, be sure to make arrangements to "fund" the need. And you may want to err on the conservative side, too, since inflation will affect the future cost of care.

Tip: Life insurance oftentime is a perfect, liquid funding asset, allowing you to leave more illiquid assets (e.g., real estate, antiques, business interests, etc.) to those loved ones without feathers, fins or fur.

Reference: The Wall Street Journal (July 23, 2011) "When Estate Plans Fail"

Don't Trump Your Will (Unintentionally)

Got it. You have signed that newly-minted Last Will and Testament. It leaves everything to [fill-in-the-blank]. Are you sure "everything" will pass to [fill-in-the-blank] upon your passing? Really? Okay, let's consider a few very common pitfalls. Consider the following estate planning insight from none other that Robert Burns, Scottish national poet (1759 - 1796):

The best laid schemes o' Mice an' Men,
Gang aft agley,
An' lea'e us nought but grief an' pain,
For promis'd joy!
(The best laid schemes of Mice and Men
oft go awry,
And leave us nothing but grief and pain,
For promised joy!)

- To a Mouse (Poem, November, 1785)

In other words, even the bestest, most state-of-the-artest estate plan can be un-donne*. So, what is the quickest way to un-do an otherwise carefully planned estate?

Open a bank account, brokerage or retirement account.

Why? Because the beneficiary designations on these accounts override your Will. Yes, it's true – the beneficiary designation is the estate planning trump card. And many an estate plan has come undone because of carelessly named beneficiaries.

The Wall Street Journal last week issued a warning in an article entitled Beware the Beneficiary Form.

“People don’t realize the importance of this,” says Martin Shenkman, an estate planning lawyer in Paramus, NJ. A carelessly named beneficiary on a financial account can cause a loved one to be disinherited, a disabled child to lose government benefits, and heirs to be slapped with a big tax bill.

The Journal also offers a few tips to protect you from this type of estate plan destruction, to include:

Know what kinds of accounts have beneficiary designations. Did you know that U.S. Savings bonds have a beneficiary form? Other accounts for which you may have named a beneficiary include retirement accounts, life insurance policies, bank accounts, certificates of deposit, stocks, bonds and mutual funds.

Review your beneficiary designations regularly and certainly after any life-changing event such as a marriage, divorce, birth or death of a loved one. Also, job-changers and retirees take note: Beneficiary designations on retirement plans don't carry over when you roll a 401(k) to a new employer's plan or to an IRA, or when you convert a regular IRA to a Roth IRA. [Sidebar: Are you divorced? The U.S. Supreme Court ruled a few years ago that when it comes to ERISA retirement plans, the last beneficiary designation of record "trumps" state law. In that case, the State of Washington inheritance laws were trumped and an ex-spouse inherited a big retirement plan instead of the decedent's children!]

Learn more about beneficiary designations in the August 2010 issue of our newsletter, aptly titled Beneficiary Designations.

Reference:  The Wall Street Journal (July 6, 2011) "Beware the Beneficiary Form"

* A subtle tip-of-the-hat to John Donne, another of my literary favorites.

Life Insurance Assurance

Chances are pretty good you have a life insurance policy... or two. This is one of the most valuable assets you can own, whether to provide financial security for your loved ones, settle up with Uncle Sam, equalize an inheritance among heirs, or provide funding for myriad other purposes. With life insurance, the right amount of money shows up just in time when it's needed most - upon your death. However, because you are not around to collect the death proceeds, will your loved ones even know you have the policy and the all-important details needed to collect?

Life insurance can be a powerful estate planning tool, but paying for it doesn't necessarily guarantee your heirs will receive the death proceeds – especially not if the policy gets lost in the shuffle of life. Remember, your heirs must initiate a claim with the insurance company to collect any benefits. In fact, New York's Attorney General's office is investigating nine leading life insurers to see whether they have done enough to identify beneficiaries of life insurance policies.

As recently explained in Reuters Wealth online, life insurance companies have an inherent business interest in not paying out death benefits . It’s just simple economics.

You should have an inventory of your assets, and make that inventory available to your family. If you are paying on a life insurance policy, or you've ever bought one, track it down and give your heirs complete information about it, to include where the paperwork is now, the policy number, the insurance company, and the name and contact information of the agent who sold it to you.

Learn more about getting your legal and financial affairs in order in the November 2010 issue of our monthly estate planning newsletter, Are You Ready?

In addition, visit our website and register to download our free Estate Organizer Kit. You (and your loved ones) will be glad you took the time to download it. Then, once you have completed the Estate Organizer Kit, be sure to: 1) give your loved ones a copy of the completed version, or 2) let them know where you keep it, should you choose not to share a copy with them right now.

Reference: Reuters (July 5, 2011) "Life Insurance: Will Your Hairs Get What You’ve Paid For?"