Estate Planning In North Dakota

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Life Insurance & Annuities

Life insurance and annuities are a strategy for providing cash to meet future needs.

See http://www.ag.ndsu.edu/pubs/yf/fammgmt/fe555.pdf

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Life Insurance

Life insurance is a popular estate planning tool, especially for people with relatively small estates. Among other things, it can be used to build an estate, provide security for survivors who depend on the insured person's income, maintain liquidity needed to preserve a business, meet living expenses for dependents while an estate is being settled and provide readily available funds to pay debts, taxes and other estate settlement costs.

Life insurance proceeds generally are paid directly to the beneficiary(ies) with minimal delay and administrative costs. They generally are not subject to income taxes. However, life insurance proceeds may be subject to estate taxes depending upon a number of factors. Gifts of life insurance policies may be subject to gift taxes (as discussed earlier) depending on the value of the policy.

When proceeds are payable to the decedent's estate, proceeds are payable from policies in which the decedent retained any “incidents of ownership,” and when gifts of life insurance are completed within three years of the death of the donor, insurance proceeds can be included in the decedent's gross estate for federal estate tax purposes. However, where the proceeds are payable to a surviving spouse, the marital deduction can be used (and thus there would be no federal estate tax liability when the fi rst spouse dies).

The insured person does not necessarily have to be the owner of the policy. In some instances, transferring ownership of a life insurance policy to another person may be beneficial to avoid the situation in which the proceeds are included in the decedent's gross estate. However, such a transfer becomes a gift and is subject to gift taxes. Another option could be to create a trust for the proceeds of life insurance. This option is discussed further in the “Trusts” section of this publication. In considering such a transfer, working with an insurance agent and other professional estate planning advisers is important to review the consequences, and if the transfer is desired, make sure the necessary changes to the insurance policy are made correctly.

Annuities

An annuity is a contract providing for regular payments, beginning on a fixed date and continuing for a term of years or for the lifetime of one or more individuals. The total of these payments may or may not equal the money or property contributed by the person establishing the annuity (the annuitant). Two common types of annuities are commercial and private annuities.

Commercial annuities are issued by insurance companies and others in the financial services industry, and the annuitant contributes a sum of money to the company, which, in return, promises to make periodic payments to the annuitant. Fixed income annuities contract for a guaranteed amount of income beginning at a specifi ed age and continuing for a set number of years or for life. Variable-income annuities provide varying amounts of income, depending on such factors as current economic conditions and the stock market. While variable income annuities may involve more risk, they also provide some protection against inflation. A provision to be aware of in a commercial annuity is the one governing what happens when an an annuitant dies. In a straight-life annuity, the annuitant typically gets payments for life or for a specified number of years, but no additional payments are made to the annuitant's estate upon death. On the other hand, refund annuities typically guarantee payments to the annuitant and also guarantee the annuitant's beneficiaries an amount at least equal to the difference (if any) between what the annuitant invested in the contract and what is received from the contract. In return for this additional responsibility, however, payments from refund annuities typically are smaller than payments from similar straight-life annuities.

Another type of commercial annuity is the joint life and survivorship annuity. Payments are made to both the annuitant and a co-annuitant for as long as either lives.

Tax rules allow annuitants to recover the amount invested in the annuity (income tax-free) during the term of the payments. The other portion of the payments represents the income from the investment and is taxed income. If the annuitant lives past his or her life expectancy, payments after this date are considered totally income and not investment. If the annuitant dies sooner than his or her life expectancy, the investment that was not yet recovered tax-free can be deducted on the decedent's final income tax return.

Private annuities differ from commercial annuities in two major ways. Property other than cash (generally real estate) generally is used to purchase the annuity, and the promise to make the payments usually is made by an individual (often a relative) rather than by an insurance company or others in the financial services industry. Those interested in exploring this type of annuity should consult with an attorney or other estate planning professional. Take great care when establishing a private annuity.

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