We know it is mechanical so there is a possibility that it is real based on that fact alone. Be able to rely on yourself, that's your ultimate security. You should attempt to maintain control over your assets whatever level they may be. That's not to say however that you should not have reliance on mechanical systems but take precautions. I do not intend in this article to pretend to know how a computer works but I know that there could be extensive down time and you really can not anticipate it and you don't want to have it occur at an inopportune time, which is why I have attempted to have this news letter circulated within my client network before the millenium, the purpose being only to put the thought in your mind of evaluating your own situation and making certain that you can maintain some type of control if Y2K does visit us. Did you try to make a phone call or get cash from the ATM during Hurricane Floyd. Y2K could be similar. There are several general precautions that could be taken at no major expense and they deal with record keeping and retrieval, and cash reserves. First, you should know where your assets are and be able to evidence where they were before the Y2K visit. Second, you should have some cash reserve on hand rather than isolated in a vulnerable bank account. We are not talking here cash invested, but rather the funds which are usually written by check or withdrawn by our friend MAC, sufficient enough for a reasonable amount of time, probably as little as a week or two, to possibly a month; just enough to evaluate if there is a problem and be able to sustain while the slow working government makes its repair. We must also protect those assets, regardless of where they are recorded, and allow them to grow comfortably. A term of the day in such context is life insurance trust. Such is probably a term not familiar to most and my outlook on the term is probably a bit broader then the legal community recognizes. We talk about the use of life insurance in estate planning but same also affords various advantages during life. I am a fan of life insurance as an estate planning tool because there are also benefits to such assets which can be utilized in life, the most recognizable being the borrowing power on the proper policy at less than market rates. Life Insurance can also be used as part of an investment strategy although the life insurance companies do not wish for us to concentrate on that aspect of the policy. Most important, however I think Life Insurance gives you comfort in knowing that there will be continuing security for your family at a certain level that is probably as close to a guarantee as you are going to get as long as you choose the proper insurance company. I personally have a diversified portfolio of whole life and term insurance with Prudential Insurance and Northwest Mutual. I like Prudential because of their financial size. I like Northwest Mutual because of their conservative nature and quality involved in their administration. I also have two very knowledgeable insurance agents, who are accessible as well as knowledgeable, Jim Flynn from Prudential and Lon Moss from Northwest Mutual. With the right structure you can have a sizable investment growth fund, when compared to your investment over the life of the policy, for distribution as you direct to your family after your death. I myself have sufficient insurance that I feel comfortable that my children will not be pressured to work in an environment where they may not feel comfortable and that they will beproperly educated. I also have the distribution of proceeds from my insurance handled through a trusted family member to oversee the administration of the funds until the children are mature enough to handle it on their own. Once in place , how do we make certain life insurance proceeds pass to the beneficiaries and are not cut off at the pass by the IRS?
How about an insurance trust?
People are not cognizant of the fact that life insurance does pass through your estate, for tax purposes unless you take certain precautions regarding the policy. There appears to be a misconception regarding the taxability of life insurance proceeds upon the death of the insured. Many people believe that there is a particular exemption for life insurance proceeds from the reach of estate tax that is not necessarily true. Most life insurance policies for the average American I suspect are owned by the policy holder upon whose life the insurance is based and provision for the payment upon death to certain designated beneficiaries. Such policy will not escape the bite of federal estate tax unless the proceeds together with the remainder of the assets in the estate do not exceed the exemption given for estate tax in general. Currently that figure in dollars is $650,000 and in the next few years will slowly increase until it exceeds a million dollars. However, one must understand that such level of assets is reached quickly when we look at the average family owning a home. One may not think that their estate reaches the level of the exemption. One must periodically review assets to determine whether the value has in the aggregate increased to where one must look to do certain estate planning to avoid their estate being taxed. It is advisable that if life insurance proceeds are not to be subject to estate tax, certain planning needs to be done regarding the life insurance. The policyholder, the insured upon whose life the policy is based, needs to transfer ownership of that policy during their life to avoid tax. Such can be done either to another trusted individual outright or placed in trust for the benefit of the beneficiaries; a "life insurance trust". However, in either case the incidents of ownership are also denied to the insured because of the transfer of ownership of the property. Those incidents include the ability to change the beneficiaries or cancel the policy or otherwise amend the policy and also the ability to borrow on the policy. I know that I for one do rely upon the cash value build up in my policies to act as a reserve during life to be able to borrow at what seems invariably to be at rates well below market. I have done so in the past and its nice to know that I have that little nestegg available to me, such is one reason why I for one am reluctant to transfer ownership of my policy. However, I shall continue to review my estate plan and it may become necessary at some point to transfer the ownership if tax volume dictates. There is also a caution given because of the applicability of the Internal Revenue Code on the Estate Tax question that transfer of the policy if such is to take place must be accomplished within more than three years before death. I have been reviewing the possibility of a life insurance trust in which a trustee is appointed in normal trust fashion and the trust is funded with sufficient funds to pay the life insurance premiums. In this forum, I do not herein plan to give a treatis on the value or mechanics of a trust but different types of trusts are used in estate planning to in effectively avoid taxes on assets that when transferred are considered as having been transferred to an independent third party, independent of the deceased. Trusts can be used during life to continue to fund certain necessities of both the Settlor (the maker of the trust) and designated beneficiaries and so a trust instrument could be used in estate planning in a fashion that would stillallow certain limited access by the trust maker to the assets placed in the trust duringhis/her life. We are available to discuss and advise clients on the necessity for estate planning and certain of the tools that can be used although we do not hold ourselves out to be tax experts. You need the advice also of your accountant and you should seek advice of an investment counselor/estate planner. Mike Napolitano of First Union Securities would be a very comfortable choice. Mike is a well respected client and advisor of this office. Robert Gallaro of Pegasus Capital Strategies LP is also well versed in the area of investment portfolio management and is one of my mentors in this business area. But as in other aspects of legal services we are asked to perform where we are not practicing in a particular area of concern being addressed, we do have other legal and other professional contacts which we have made over the years that we feel very comfortable in referring to a client to more aptly answer questions raised where we do not feel comfortable in giving total advice. Some of the more common referrals that we do make are to individuals and entities recognized in the newsletter.