Life Insurance

Using Life Insurance in Texas Estate Planning

Published on: October 14, 2021 | By McCulloch & Miller, PLLC

Throughout time, the purposes of life insurance in the estate planning context have simultaneously remained constant, while also dramatically changing. These alterations have occurred because of state and federal regulations. And these changes impact how estate planning attorneys advise their clients. However, it can be difficult for Texans to know the ways that life insurance can protect them against tax liabilities, along with ensuring assets are left for loved ones. Below are common ways—both previously and currently—that life insurance can be used in a Houston estate plan to benefit both the estate plan drafter and their family.

Paying Estate Taxes

Life insurance can be used to protect individuals against estate taxes. Previously, life insurance was traditionally used in estate planning for this purpose. While Texas does not have any state estate taxes, there are still federal estate taxes to worry about. Currently, individuals with an estate valued over $11.7 million will have to pay a tax. In these instances, people are often advised to use part of their life insurance policy to pay this amount—otherwise, the person’s estate will be required to pay this tax, and it may be taken out of assets otherwise given to heirs.

How to Use Life Insurance as a Part of a Houston Estate Plan

Published on: February 26, 2021 | By McCulloch & Miller, PLLC

People know the inherent benefits of having life insurance. They also know the need to have an estate plan in place. However, not many individuals know that life insurance can be utilized within an estate plan to benefit a person’s loved ones after their passing. For families in Houston, this can maximize their wealth to take care of the people they love most—even after their death. For many, the preferred method to use a life insurance policy in an estate plan is to establish an irrevocable trust, which can allow the benefit to be transferred to loved ones after the person’s death without tax implications. By creating a life insurance trust, individuals transfer ownership of the life insurance policy to the trust.

Building an irrevocable trust may seem like a complicated process, but with the help of an estate planning attorney, the trust can be created with ease. The first step is to establish the trust, where the life insurance policyholder names another party to serve as the trustee. The trustee uses the assets in the trust to pay life insurance premiums. After the creation of the trust, the trust itself “owns” the life insurance policy until the person’s death. It is important to note that the trust is irrevocable, meaning the individual cannot change the terms of the trust after it has been established.

While this option may seem strange for many, there are inherent benefits to doing so. For one, turning the life insurance policy into an irrevocable trust has a tax advantage. The proceeds that beneficiaries receive from this trust are generally excluded from the beneficiary’s gross income. Since the trust technically “owns” the life insurance policy, it is not an asset that would be taxed like normal inheritance would be. Beyond the tax advantages, a life insurance trust provides a guaranteed source of income for loved ones. As long as a beneficiary—a loved one or close friend who the individual wants to receive the funds—is named on the policy, the benefit proceeds are directly paid out to the beneficiary without going through the probate court process. This speeds up the process so the heirs can use the funds to pay for immediate costs, like estate taxes or funeral expenses—if necessary.

How Older Adults Can Help Prepare Their Loved Ones for the Inevitable

Published on: January 5, 2021 | By McCulloch & Miller, PLLC

Thinking about death can be extremely upsetting. People do not want to imagine their loved ones coping without them or having to handle their affairs after they have passed. However, some of these worries can be avoided. Older Texans can help their heirs before they die by keeping their affairs orderly and having a Houston estate plan in place. These steps may seem unnecessary but can help loved ones avoid key errors that often occur after a person’s death. Below are some tips everyone can follow, so their beneficiaries and loved ones will be able to efficiently execute their estate and wishes.

Have an Estate Plan in Place

While this tip may seem obvious, having a detailed estate plan in place is the only way to truly ensure a person’s wishes are honored after their passing. Estate planning is arranging – during a person’s life – the management and disposition of their estate after they have passed away. Often, this includes writing a will and naming beneficiaries who will receive any assets or property the person owns. Without an estate plan, loved ones will need to go to probate court before any assets can be distributed. The time and money spent going through this process – often a considerable amount – could all be avoided if the individual had created an estate plan. Then, their loved ones could focus on grieving and emotionally recuperating, rather than paying legal and court fees as the probate court process drags on.

What is a Houston Life Insurance Trust?

Published on: November 24, 2020 | By McCulloch & Miller, PLLC

Many individuals – especially those with children – do not want to think about what would happen to their family if they passed away. Although many people have life insurance to cover the cost of raising a child in the event of their untimely death, they do not think about establishing a trust to hold the money for them. Despite the common misconception, trusts are not just for the rich. Rather, they are critical tools for young families and an important part of a comprehensive Houston estate plan. Below are some of the common questions that individuals have about life insurance trusts.

How Does a Life Insurance Trust Work?

Individuals will set up a trust as part of their overall estate plan, typically, when they are creating a will and naming guardians if they have minor children. A trust holds assets – including property and money – for the listed beneficiaries, and the individual creating the trust details how the assets should be utilized. Additionally, the person appoints a trustee to oversee the process and ensure the assets are handled as written.

How Business Owners Can Use Insurance As a Houston Estate Planning Tool

Published on: September 15, 2020 | By McCulloch & Miller, PLLC

From creating a will to establishing a revocable trust, there are many tools and options available to individuals creating a Houston estate plan. However, many people are unaware of the role insurance can play in an estate plan, especially for small business owners. Many estate planning attorneys will advise their clients to obtain life insurance, if they do not have it already, when planning ahead for their future. Besides merely obtaining insurance, there are vital steps business owners should follow when creating an estate plan.

Why Purchasing Life Insurance is Vital

Nothing can replace the loss of a loved one; however, having insurance can help soften the financial blow if tragedy strikes. If the loved one was an owner of a business and the family is looking for someone else to purchase the company, an insurance policy can allow the family to take the time to transition the company during a new period of leadership. Without life insurance during this time, the family would be a majority owner in a business they do not want to run and, often, requires a more experienced person to lead.

How Does Life Insurance Factor into Estate Planning?

Published on: January 27, 2020 | By McCulloch & Miller, PLLC

Some people think once the children are all grown up, with spouses and children of their own, that they don’t need life insurance. However, it can play a valuable role in protecting the family and transferring wealth.

With estate tax exclusions at levels that make them a non-issue for most Americans, the practice of purchasing second-to-die life insurance policies to prepare for estate tax costs has faded.

However, IRAs, 401(k)s, and other accounts are still 100% taxable to the individuals, spouses and their children. The stretch IRA options still exist, but they may go away, as Congress may limit stretch IRAs to a maximum of 10 years.

How Life Insurance Works During Retirement

Published on: October 9, 2019 | By McCulloch & Miller, PLLC

Life insurance is a financial tool that can be as powerful during retirement, as it is during your working life. In many cases, it can be a real lifesaver for a surviving spouse.

Most of us think about life insurance as income replacement for a breadwinner’s salary. That is certainly true. However, life insurance doesn’t stop being useful during the later years, says Kiplinger in a recent article, “Don't Overlook Advantages of Making Insurance Part of Your Retirement Plan.”

The income replaceme nt function doesn’t go away during retirement. It might even be more important.

Make the Most of Life Insurance

Published on: March 25, 2019 | By McCulloch & Miller, PLLC

Life insurance is the bedrock of many people’s financial plan. There are more nuances to life insurance, than just buying a policy and paying premiums.

It’s not the most fascinating topic, unless you’re in the business, but understanding the basics about life insurance can have big implications for you and your family, according to a recent article, “4 questions to ask to maximize your life insurance benefits” from WTOP. Here’s what you need to know about life insurance:

Changed Circumstances. The amount of life insurance you need, is unique to each person’s financial and family circumstances. Remember that life insurance death benefits are used for more than just replacing immediate income from the family breadwinners. They can also pay off the mortgage and other debts, cover college tuition, create a retirement nest egg for a surviving spouse, fund a business transfer, or be an important estate planning tool. With life insurance, you can protect your family against a premature death with a solid safety net. In the event of divorce with future child and spousal support obligations due to you, you’d want your divorce settlement agreement to say that your ex-spouse, as payor, maintains a sufficient life insurance policy naming you, as the recipient-beneficiary, to cover all future commitments. You also need to be notified by the insurance company of any policy changes or lapses because you may be depending on this money in the future, should something happen to your ex-spouse. Stay-at-home spouses and caregivers also need life insurance, because replacing their duties could incur many unexpected costs for the survivor.

Wake Up and Smell the Coffee: Take Care of These 3 Financial Tasks

Published on: March 15, 2019 | By McCulloch & Miller, PLLC

These may be common mistakes, but they are too important to dismiss and delay.

Every year, local television news crews show up at local post offices to see the lines of folks waiting to get their tax returns postmarked on April 15—even when so many of us are using online tax services. We just tend to delay taking care of tasks that are not a lot of fun. However, according to Motley Fool, there are “3 Money Moves You Can't Afford to Put Off.”

An emergency fund. We're supposed to have at least three months' worth of living expenses in savings for emergencies, but 40% of Americans don't have the money to cover even a $400 unplanned expense. That means they're not even close to where they should be with their savings target. Without an emergency fund, you risk incurring costly debt if your paycheck disappears or you experience a surprise bill your regular earnings can't cover.

How Life Insurance Works Best in an Estate Plan

Published on: February 15, 2019 | By McCulloch & Miller, PLLC

Life insurance can help heirs avoid having to incur expenses like estate taxes, funeral costs and similar expenses. However, it also gives heirs breathing room, so they can make the best use of other assets.

Here is an example of how life insurance should work. A father, Howie, dies and leaves a large estate to daughter Eva. The estate is large enough that it triggers a huge estate tax. However, the bulk of his assets are tied up in an IRA and real estate properties, some of which could be put on the market quickly, but not quickly enough for tax deadlines.

With that scenario, Eva might not want to immediately force a sale of the real estate. However, if she accesses the inherited IRA to raise money, she’ll have to pay income tax on the withdrawal and lose a terrific opportunity for extended tax deferral.