Financial Strategies Inc. Estate Insurance and Pension Review

Nothing else can substantially change the chemistry of a decedent's estate plan than to have a large death benefit payable to the actual estate as beneficiary! If this situation applies to your estate, and it pushes the size of the estate "over" so that federal estate inheritance tax is now due, you most likely have a clear claim of E&O (errors and omissions) against the agent who set the plan up!

Paying a life insurance death benefit to a trust is fine and a great option for savvy insurance advisors who know their estate planning well. In fact, our firm plainly tells our own insurance clients who buy large amounts of life insurance that they should name their family trust as the primary beneficiary. When we find a trust does not exist, we do a pretty good job of giving general legal information to the client so they can see that trust ownership is the best way to hold ownership and to receive the tax free death benefits!

You can use the family living trust in cases where the death benefit and other beneficial assets + the non beneficial estate assets do not exceed the allowed estate limits for avoiding the inheritance tax. Or, you can inquire about our Irrevocable Life Insurance Trust (ILIT) if you would like to pay a death benefit into an alternative trust that doesn't directly load your estate up with value at death.

For non trust estate managers, filing death claims on all term or permanent life insurance policies that were found in your initial estate review and inventory session is very important to concentrate on now, if not already done. Substantial amounts may be due either the estate or hopefully, the listed beneficiary or beneficiaries other than the estate.

To file claims, you simply research and find the policy number along with the proper current address for the insurance carrier you are going to make a claim on. An alternative to writing and faster approach is to research and find the proper phone number for "claims" and make the claim over the phone. Once done, paperwork is going to be sent out that you will have to complete. Additionally, you will need to submit proof of death, which can usually be satisfied by the claims department just by giving them a certified copy of the death certificate.

If you have any trouble here in Arizona, contact our office. We are insurance brokers for many major firms and maintain a database of claims departments and contact information. We can also assist you in the claims process as your insurance consultant, an option many like since the claim process and paperwork can become overwhelming to many. We have helped pay out millions of dollars for over 34 years, so it is just ordinary work for our firm should you decide to let us do the claim work for you.

Qualified funds are all retirement savings accounts such as IRA's, 401-k's, Pensions, SEP's, etc. that were accumulated over the working years of the deceased estate owner. If you are the surviving spouse, we want to tell you that it is quite easy to do this Step. Just do a spousal rollover. You can stay where your spouse had the funds or transfer them just about anywhere else you want to invest these funds without paying any tax on the transfer. But, be sure you do a direct transfer. If you take some of the funds out as a surviving spouse, they will be 100% taxable, so please seek a tax opinion if you are thinking about cashing spousal Qualified funds in.

Non-spouse beneficiaries are treated much differently under the IRS statutes and rules. Unlike life insurance death benefit payment decisions that are simple and you only need to decide if you want to take a lump sum or some other form of payments, Qualified pension plan money has an extremely complicated grid of decisions that must be made for non-spouse heirs. And, if the estate is facing Federal estate tax, a grid of decisions also applies to spousal disclaimers to try and avoid loading up the surviving spouse's estate in fear of paying 45% or higher federal inheritance tax on these funds ON TOP OF THE HIGH 40%+ PERSONAL AND STATE INCOME TAXES THAT ARE DUE. (Yes, we know the feds allow a credit for personal taxes paid, but the tax rate combined can still burn away 60% or more in some cases!)

Making the wrong decision and causing needless taxation of the funds is like withdrawing hundred dollar bills and throwing them into your fireplace! If the size of the Qualified funds is quite large, one small mistake made by the estate manager's advice to the beneficiary or beneficiaries, or by the beneficiary or beneficiaries own mistake -- money will burn up from Federal and State taxation that could have remained tax deferred for many, many years.

And, if some or all of the Qualified funds are Roth accounts or were converted from traditional IRA's into Roth IRA conversion accounts, chances are high that the estate owner now deceased left explicit written instructions for how the heirs should treat these funds. Most likely, if they converted the Roth funds during their lifetime, they felt the pain in their pocketbook quite a while after! And for that reason, they normally would suggest the heirs use this money "LAST"!

But, that is exactly how ALL Qualified funds should be treated. There is a very good reason. Just as time makes an amount of money grow and eventually double or triple in a solid investment program due to compound interest (Einstein called it a wonder how it works), the same principle of compound interest works exactly the same in a Qualified account too. In fact, it is better than any taxable plan because the money grows tax deferred without current taxation on the main portion of the funds for as many years as you desire to leave it in the account. And, with the right IRA Consultant, financial decisions can be made that will allow your IRA funds to continue on tax deferred to your children or even your grandchildren!

The only taxation that takes place each year is on the minimum required distributions (MRD) that takes place in beneficiary or inherited IRA accounts. You just have to make sure any account you set up as your Inherited IRA transfers the funds directly so that you don't have possession, and that the name of the deceased IRA owner remains coded as a "decedent's" IRA on all account listings.

The MRD"s do not substantially affect the growth in an inherited IRA account properly invested, since the age is reset to that of the beneficiary (that happens now) and the government uses the most current life insurance mortality table, the 2001 CSO (Commissioners Standard Ordinary Mortality) to figure how long you will live. This table provides for the longest life in the history of our country to date, so the MRD's based on this table merely amount to Christmas money for most and leave most of the IRA intact every year to keep growing in it's tax deferred wrapper -- compliments of the United States government.

There is one complication we see in our past estate or investment cases we have handled. That is the complication of leaving the IRA to the family living trust. Few insurance and investment advisors understand the damages caused by this situation, which is a mistake in most cases. Only when the funds are extremely large and the heirs are spendthrift cases should this even be considered. We have also noticed that CPA's and Institutional Trustees have used our own website on this subject, which can educate you more on the options available when you inherit

And, when it is warranted to name the family trust as the primary IRA beneficiary of large accounts, one should be very careful to include the required IRS requirements that apply in order for a living trust to legally receive, manage and control these funds. Failing to find these provisions in your trust, if this applies to you now, means the funds may very well be taxable! And, when your family accountant shows you the tax rates for trusts (same as corporations), the highest tax rates in the U.S. -- you are going to be giving your family lawyer a call to ask how much E&O (errors and omissions) insurance they have! (They won't tell you)

We can't change what was set up prior to death. But, we can help you identify your options in any IRA situation by referring you to our sister website that has a controversial name, but is the best Inherited IRA informational website in Arizona and one of the best as well in the United States. Be sure to register so you can gain FULL access to this important information.

There is no better place to sell insurance than in an airport! In your process of uncovering and placing value on estate assets you also have found insurance plans and policies. Some may still be valid and coverage may still apply for a death benefit and others you will find had lapsed or are no longer in force. Be aware that sometimes, you may find two policies that look identical and this would be because the insured temporarily lost a policy in the home and ordered a duplicate, only to find the original plan later. Make no mistake, only one will pay as long as the both bear the same policy number. One will be marked with a stamp "Replacement" or "Duplicate Policy". We just want to give you a heads up if it applies, which we find occasionally in estate insurance files for clients.

We want to address any accidental or dismemberment plans you may find in the estate files or policy wallets now in your possession. Specifically, these plans do not pay for normal deaths from natural causes. They only pay for the coverage's listed on the policy pages. The dismemberment coverage is extremely limited just in case something horrible happened in your loved ones' case. If you think there is a claim, please note that the fine print states requirements to get the designated claim money per incident. For example, if coverage $5,000 for the loss of a hand, they mean a hand cut off past the joint!!! We used to kid folks in a seminar we did back in West Des Moines Iowa and tell our seminar attendees that if you saw off most of your hand making wood Christmas toys for your grandchildren, just shove it in there a little further to be sure your policy pays you! Yes, it is horrid to say that, but that is how limited these policies are. Maybe that is why they are clearly stamped diagonally in red print "Limited Coverage, Read Policy Carefully" (Yes, we were kidding and never expected someone to do it!)

Another limited coverage for seniors is the accidental death coverage in these plans. We had a case many

many years ago back in Iowa where our practice started and it involved a man who we insured who hit a bridge and died in the accident. He had an accidental death policy with a very high death benefit if it could be proved he died in a common carrier accident which in this case, included driving his car. Well, he drove his car into a bridge and it killed him. But, the carrier of the policy argued he had a heart attack which caused him to lose consciousness which of course, caused the vehicle to veer into the bridge. The argument was that he died BEFORE hitting the bridge from natural causes and they won, so no coverage was paid! Again, you are getting heads up here too, just in case this situation applies to you. When you look at how cheap the premiums are for these type of policies, you can see why getting paid on claims is about as easy as making snow fall in Phoenix!

Lastly, we want to address credit, bank, employee benefits and other group accidental death coverage policies and coverage's that we didn't already discuss in Step 20 above. Some of these plans may have a super fantastic death benefit like $400,000 or more, so we want to make sure you dig to see if any policies are in force and then, to determine with the very restricted payment rules, if any death benefit is now payable to the listed beneficiary. In the rare case you have an actual claim, the benefit can substantially throw off the estate plan, especially if it is payable to the estate direct and the estate is close or over the limits excluding the need to file Form 706 and pay the inheritance tax on some or all of the funds you receive.

Remember: Always name your estate as the last resort beneficiary on ANY type of life insurance policy.

This Step, for some, may be one of the most time consuming and difficult if your loved one had a long period of illness prior to death. We have already warned you about the consequences of signing "assignment" paperwork in order to qualify for Medicaid type coverage for a disabled person. We won't cover that possibility other than to ask you to be careful in this area before you attempt to transfer any estate property if indeed, a lien was placed on the estate home back when you signed the paperwork for such an assignment perhaps even to keep the patient in the hospital versus facing the option of them running out of standard Medicare coverage, and running out of supplemental Medicare insurance or nursing care coverage as well. (Or never having supplemental type medical insurance coverage) Just be sure to see where you stand and that you understand what happened if Medicaid kicked in. Legal advise is not really an option for most families in this situation, but a necessity!

Now, let's address what may now be a pile of paperwork sorted out with medical doctor bills, hospital bills, lab bills and of course, Medicare claim forms as well. Though most health care providers have you assign your Medicare coverage directly to them and in return, handle the billing and payment direct for you, other medical providers do not. Some firms are not allowed to bill you but have a funny little practice to still send you a bill!

The only way to sort through and figure out what needs to be paid as a legitimate medical bill that was not covered, or fully covered, is to sort them and match the Medicare claim payment receipts that show how much was paid and to who and when it was paid. Then, once you have a match, you have to investigate if the medical firm who was paid is allowed to bill for excess fees and expenses not covered under Medicare. As a careful estate manager, you will want to withhold payments until you are reasonably sure the money being billed is legitimate. Medicare fraud and medical billing fraud is at an all time high, so ignore the threats and the harassment you may receive if a bill remains unpaid and they start collection activity. The deceased loved one no longer has to worry about their credit rating now do they?

The bookkeeping and accounting division of our firm is available for employment to help you when you get confused, as many estate clients have in the past until we helped them sort and verify which bills are legitimate and still need to be paid. And, we will always refer you to legal services when our level of help is not enough for certain medical bills that may come and require legal advise in how you proceed to settle or ignore them. One thing that is true is that if the fraud in billing was suddenly removed, most of our health care system would be perfect unchanged in any other way from the way it is right now. It is still the greatest on earth no matter what the politicians tell you! Just ask a Canadian...