Who Owns Your Life Insurance Policy?

While it is common to think of life insurance planning in terms of type and amount of coverage, a more complete analysis should also include policy ownership. In many cases, the proceeds of a life insurance policy may be unnecessarily included in your estate unless you plan ahead to avoid this event.

Without insurance, many estates fall below $2,000,000. This is the level at which an individual’s wealth becomes subject to federal estate taxes for 2008. The proceeds of life insurance can push the value of your estate to a level where the Internal Revenue Service (IRS) will make substantial claims. Indeed, the federal estate tax is a sliding scale that reaches as high as 45% in 2008.

There are two ways to keep insurance proceeds out of your estate:

1. Give your insurance policies to someone else, generally the beneficiary(ies).
2. Transfer the policies to a trust.

Either option, if done properly and in a timely manner, will decrease your federal estate tax. You may not need to worry about changing ownership of a policy that names your spouse as the sole beneficiary. The unlimited marital deduction allows the policy proceeds to automatically escape estate taxation. However, you may benefit from transferring your policy out of your estate if the purpose of the insurance is to help pay estate taxes or provide for heirs other than your spouse.

The paperwork involved in changing insurance policy ownership is relatively simple, requiring a form provided by the insurance company. However, you do have to sign away all rights to your policies. That means the gift must be absolute and irrevocable. You cannot change your beneficiaries, and in the case of policies with cash value, you no longer have the right to borrow against them or sell them for their worth in cash.

Keep in mind that if the transfer is done within three years of your death, the policy proceeds are still considered a part of your estate, regardless of ownership. Thus, proper planning is necessary in order to help ensure the desired results.

Ownership of individual and, in most cases, group insurance can generally be transferred to anyone in or out of your family who is old enough to handle money. Depending on your particular circumstances, it may be advisable to give a policy directly to a beneficiary or, in the case of a minor, to a trust that is designed for the benefit of a child.

In all cases, it is important to carefully review the consequences before signing away insurance. For specific guidance, be sure to consult your qualified tax and legal professionals. Gifting insurance may have gift tax consequences if the transfer is to anyone other than your spouse. In 2008, the annual gift tax exclusion is $12,000 per gift to any single donee and $24,000 for gifts made jointly by husband and wife.

For those in higher tax brackets, one useful technique to shelter large policies from estate taxes—and to protect the interests of children as beneficiaries—may be to transfer ownership to an irrevocable life insurance trust (ILIT). When you die, the trustee named by you will distribute income to your beneficiaries or, if necessary, use the proceeds to pay estate taxes.

The issues of policy ownership are no less important than the decisions you make regarding what type of policy and how much insurance you need to fulfill your objectives. When planning your insurance program, take care to cover all the bases.

Note: According to the Economic Growth and Tax Relief Reconciliation Act of 2001 (EGTRRA), the federal estate tax will be repealed for exactly one year in 2010. In 2011, it will be reinstated at levels in effect prior to EGTRRA, unless Congress takes further legislative action.

Pension Payout Options: What’s Right for You?

Thoughts of retirement are often accompanied by images of the enjoyable ways you’ll spend your days. One thing you may not even consider, though, is that you may be faced with a very important decision come retirement day. If you participate in a company pension plan, you’ll have to decide how you want to receive your pension proceeds. For this reason, take the time now to consider your options, so when the time comes, you can make the choice that’s right for you.

Typically, most pension plans give retirees the following choices:

1. Income for the rest of your life (single life option)
2. Income for the lives of both you and your spouse (joint and survivorship option)
3. A lump-sum distribution

At first glance, you might think your marital status will dictate which option is best for you. But, there’s a lot more to it than that. Let’s take a closer look at the options. The first two options (single life and joint and survivorship) provide you with a fixed income (usually in monthly installments) in exchange for your pension balance. The third option (lump sum) allows you to take your entire pension balance, and you can manage it yourself.

If you’re worried about outliving your assets, regardless of your marital status, you should take one of the two “income” options. It’s a simple way to ease your fears about running out of money. If you’re single, this choice is easy because you can select only the single life option. If you’re married, however, it’s a different story altogether because you can choose either income option.

The single life option pays a higher monthly income, but payments cease at your death. While the joint and survivorship option pays a lower monthly income, payments continue until the death of both you and your spouse. If you have other substantial retirement assets or your spouse has his or her own pension, taking the larger income offered by the single life option may be your best bet. On the other hand, if your pension is all you and your spouse have, the spousal security offered by the joint and survivorship option might make sense.

As you carefully review these two income options, keep in mind that there may be an actual “third” income option. This third option is really a combination of the first option—the single life option—and life insurance. By taking the higher income with the single life option and using some of that income to pay the premiums on a life insurance policy, you may be able to “net” more income than with the joint and survivorship option. All the while, your spouse will be protected by a potentially significant life insurance death benefit. After your death, the death benefit proceeds will be received income tax free by your spouse and can be used to help fund his or her own retirement income.

The success of this strategy—often called “pension maximization”—depends on your age, your health, the type of insurance policy, and the schedule of premium payments. The issuance of a life insurance policy is subject to underwriting approval, and the issuance of a policy at a reasonable premium is not guaranteed. If the premium takes up too much of your monthly benefit amount, this strategy may not make sense. In addition, guarantees of a life insurance policy are based upon the claimspaying ability of the insurer. You should analyze your situation carefully with the assistance of a financial professional before proceeding with this strategy.

As previously mentioned, selecting either income option requires that you give up your pension balance in exchange for income. In other words, you can’t just select a payout option one day and then decide at a later date that you’d like to receive your remaining pension balance in a lump sum. With this in mind, let’s turn our attention to the final payout option—the lump-sum distribution.

Taking Control

If you want full control over your pension assets during retirement, or if you are concerned that your pension income may not keep pace with the cost of living, then a lump-sum distribution could be the thing for you. You can take a lump-sum distribution in one of two ways. You can either roll it over into your own Individual Retirement Account (IRA) or receive the pension proceeds net of income taxes. Unless you plan on using your pension assets for something other than retirement, don’t even think about receiving your lump sum net of income taxes. The IRA rollover makes the most sense because you’ll continue to receive the benefits of tax-deferred accumulation and only be taxed when you take withdrawals from the IRA.

As you can see, before you relax into a comfortable retirement, you must make a difficult decision about your pension proceeds. This will require you to carefully consider several options and determine which one best meets your financial needs and goals.

Focus on Women: Building a Retirement Plan

If, like many women, you are juggling competing demands, such as family, career, and a household, you may feel tempted to relegate retirement planning to the bottom of your “to do” list. But by putting off preparations for retirement, you run the risk of becoming one of the large number of women who spend their golden years struggling just to get by. And you don’t want to be in that group— especially since you can avoid it with the right planning.

Saving enough money to pay for a comfortable retirement can be a challenge for most Americans, and it can be especially challenging for women who may, when compared with men, earn less, spend fewer years working, and live longer. These concerns are often more acute for women who are divorced, widowed, or otherwise single, as well as for those who have spent all or a significant portion of their adult years caring for children and other family members.

According to the most recent statistics from the U.S. Department of Labor (DOL, 2007), only half of all working women in the United States participate in a retirement plan (47% of 60 million as of March 2005). In addition, women typically spend nearly 12 years out of the workforce while taking care of children or elderly parents, and the average woman in the U.S. in full-time employment earns less than her male counterparts (81 cents for every dollar a man made in 2005). Women are further disadvantaged when their jobs are part-time or with smaller firms that do not offer substantial retirement benefits.

Because of shorter careers and possible lower incomes, a substantial proportion of women currently do not receive enough in Social Security benefits to meet even their basic needs. According to the Social Security Administration (SSA, 2007), women’s average monthly retirement benefit in 2004 was just $784. And married women often do not realize that the retirement benefits their husbands have accrued may fall away if they are widowed or divorced. These combined factors put many women at high risk for poverty as they age, especially if they don’t do the needed planning now.

Clearly, most women will need to build up their own retirement savings if they wish to maintain a reasonable standard of living in their later years. Here are some strategies you can use to get started:

• If your current employer does not offer a good retirement plan, consider your options for securing better benefits. While companies with defined benefit plans that replace a percentage of income (based on your salary and years of service) are becoming increasingly rare, you should consider the long-term consequences of a job with a firm that does not at least match contributions to a 401(k) or other defined contribution plan. If you are lucky enough to be employed by a company with a traditional pension plan, find out what your benefit is likely to be and at what age you can collect the maximum benefit.
• Take advantage of the tax benefits of qualified retirement plans and traditional Individual Retirement Accounts (IRAs). Depending on your financial situation, you may find that making pre-tax contributions to a retirement account will not significantly reduce the amount of money you have available to spend. Contributions may decrease your current taxable income (and, consequently, your ultimate tax bill), and earnings are tax deferred. Taxes will be due when you begin taking distributions. If you withdraw money prior to age 591⁄2, a 10% federal tax penalty will be due in addition to income taxes.
• Consider the role a Roth IRA or a fixed annuity may play in your long-term plan. Contributions to Roth IRAs must be made with after-tax dollars, but earnings grow tax deferred. Qualified distributions made after age 591⁄2 are tax free, provided the account has been owned for five years. Certain income limits apply. Fixed annuities allow you to save money on a tax-deferred basis and offer you an option for managing assets and receiving retirement income. All guarantees of income are dependent on the claims-paying ability of the issuer.
• Plan to work longer if necessary. Even a few extra years spent working will enable you to save more money toward your retirement. Your costs may also be substantially lower if you put off retiring until you qualify for full Social Security and Medicare benefits.
• Arrange to pay off your mortgage and other debt as quickly as possible. Owning a house outright in retirement not only ensures that you will have a place to live, but it can also serve as a valuable source of equity, should you need it. To give yourself an incentive to pay off your credit cards, you may want to resolve to turn your monthly credit card payments into retirement account contributions, when the debt is gone.
• If you are married, assess the capacity of your husband’s retirement benefits to meet your future needs. Given the possibilities of divorce and widowhood, it is essential that you plan for a time when you will have to manage on your own. If you are staying at home while your spouse is working, set up an IRA in your own name. Find out, too, what rights you may have to your spouse’s pension in the case of death or divorce, and research the effects of divorce and remarriage on your Social Security benefits.
• If your family budget is tight, carefully evaluate the benefits of putting extra funds into your own IRA or 401(k) versus putting money in a savings account for your children’s college education. Your children may be able to get financial aid or lowinterest loans to help pay for college, but there are no grants or scholarships for retirement. Also bear in mind that some funds may be withdrawn from a retirement account before the age of 591⁄2 penalty free if (Continued on page 5) used for qualified education expenses.
• If you own a business, you should consider implementing a retirement plan for you and your employees. Not only will a plan help you to live comfortably in your retirement years, but it may also be fully deductible, thereby reducing your business’s current tax liability. If you already have a retirement plan for your business, you should review it with your advisor every few years to ensure it is still the best plan for your business and you are taking advantage of all tax benefits you may be entitled to take.
• If you are an executive and your company offers you the opportunity to participate in a non-qualified deferred compensation plan, consider the opportunity. Again, it will decrease your current income tax liability while providing you with an additional pool of money to draw upon in your retirement.

Saving for your own financial future should be a priority, even when there are bills to pay and the wants and needs of children and other family members feel pressing. While taking care of others is important, so is paying yourself for the many contributions you make to family life.

Business Owners: Keep Sight of Personal Priorities

In the rush of day-to-day business activities, many small business owners may lose sight of what they had originally hoped to accomplish from their hard work. Over time, as a business grows, personal objectives that may have been suitable at one stage in life often change.

Do you ever stop to reevaluate and update your personal goals and priorities? The following are some key concerns of many small business owners:

• Strengthening Personal Finances and Building Wealth. Many business owners become so engrossed in running their companies that they inadvertently end up putting their personal finances on the back burner. This may occur if most of their liquid assets are tied up in the business. However, to achieve financial independence and build personal wealth, it is important to make personal savings a priority. By conducting regular financial reviews, and taking follow-up action as needed, you can help develop and strengthen your personal financial position.
• Preparing for Retirement. Many taxdeferred, qualified retirement savings vehicles, such as simplified employee pension plans (SEPs) or 401(k) plans, are available to business owners and their employees. The size of a company, as well as the ages and salaries of its employees, often determines which type of retirement plan is best in a given situation. In addition, nonqualified plans allow business owners to provide selective benefits for themselves, as well as their key employees.
• Developing an Exit Strategy. Will your small business be marketable if and when you decide to sell? It is important to develop an “exit” strategy that can help provide cash commensurate with the value of your business in the event you choose—or are forced (due to death or disability)—to divest.
• Retaining the Company within Your Family. Your company, like many others, may be a closely held business, operated by more than one family member. If you wish to keep your company in your family, it is important to learn about transfer tax issues and develop a business succession plan that will help secure your long-term goals and objectives.

Stay Focused

As your company grows and develops, it is important to keep sight of your personal priorities, particularly as they change over time. Annual reviews can help ensure your business activities are consistent with your longterm personal goals and objectives.

Life Insurance and Divorce:
Protecting Your Family’s Future

Sometimes in life things don’t work out as we plan. One of the most trying examples of this is when a couple decides they can’t make their marriage work and, subsequently, file for divorce. Divorce takes a significant financial and emotional toll on both parties, their children, and other family and friends. In the midst of the immediate financial and legal concerns, couples need to look beyond the present to help ensure that their financial futures are secure and that the future needs of children, such as education expenses, will be provided for in the event of an untimely death. Life insurance may offer a solution.

According to Parents Without Partners, an international, nonprofit, educational organization devoted to the interests of single parents and their children, approximately 13.5 million single parents had custody of 21.7 million dependent children in 2000. The average custodial parent’s income was $28,000, and 85% of custodial parents were mothers.1 With the majority of care belonging to mothers with relatively modest average incomes, concerns arise regarding the future educational expenses of college-bound children. According to The College Board’s annual report, Trends in College Pricing—2007, the average sum of tuition, fees, room, and board for the 2007–2008 school year was $13,589 at public colleges and $32,307 at private colleges.

Because educational expenses are only expected to increase, the need to plan for future financial security during divorce becomes even more paramount. Let’s look at several different scenarios.

After divorce, if the spouse paying alimony and/or child support were to die, then the custodial parent may be hard-pressed to maintain the children’s current lifestyle, let alone be able to afford the potentially significant college fees. On the other hand, if the custodial parent were to die prematurely, the ex-spouse may be at a loss to cover daily childcare expenses. For these reasons, divorcing couples may want to strongly consider making life insurance policies part of the divorce decree.

A custodial parent may want to look into purchasing a life insurance policy on his or her ex, but if this turns out to be an impossibility, transferring ownership and beneficiary arrangements on an existing policy may be another option. If policy premiums fall outside of the budget, the custodial parent may request alimony or child support increases to cover the costs. If the non-custodial parent remains the policy owner, the divorce decree can include arrangements to ensure the custodial parent is named as the irrevocable beneficiary and receives ongoing proof that the payments continue to be made and the policy remains in effect.

A parent without custody may wish to keep the policies he or she already has to protect the financial interests of other family members, such as children from a new marriage. In this case, the non-custodial parent should consider purchasing a new policy on his or her life with the ex as the owner and beneficiary. If this is done before or during the divorce proceedings, gift tax will not be owed. Premiums may be tax deductible as alimony if policy ownership belongs entirely to the ex.

For existing policies, individuals should remember that the insurance company must be notified of any beneficiary changes: Using a will for this purpose will not be valid. In addition, should the insured remarry and the policy name the “husband” or “wife” of the insured as the beneficiary, the new spouse may receive the proceeds. If the insured does not remarry and this same policy language is in force, then the proceeds may be paid to the secondary beneficiary. If the insured’s estate is named as the new beneficiary, insurance proceeds will likely be held up in the probate process. If minor children are named as the new beneficiaries, additional problems may arise, as insurance companies generally will not pay minors directly. For this reason, it may be a good idea to create a trust for minor children and name the trust as the beneficiary of the policy proceeds.

Laws vary from state to state, so consulting with an insurance professional is very important. Divorce is rarely easy, but with a well-planned strategy, the short- and long-term financial needs of children can be ensured should life take an unexpected turn.

¹ “Facts About Single Parent Families,” Parents Without Partners, International,
www.parentswithoutpartners.org/Support1.htm, July, 2005.

Tax Deductions for Work-Related Moves

Given the differing and expanding job opportunities located in various parts of the country, few people now spend their lives living in a single location. If you’ve moved, or are planning to move, because of a change in your job or its location, did you know that you may be able to deduct your moving expenses on your tax return? In order to qualify, your move must be closely related to the start of work, and it must meet both the distance and time tests.

The Distance Test

In order to satisfy the distance requirement, your new job location must be at least 50 miles farther from your former home than the location of your old job. For example, if you traveled 5 miles from your former home to get to your previous job, your new place of employment must be at least 55 miles from your previous home in order for you to qualify. If your new job is located 50 miles from your former residence but your previous work location was 10 miles from your former residence, you would not meet the distance requirement.

It is important to note that the distance test only considers the location of your former home and your work locations; it does not take into account the location of your new home. Your principal job location is defined as the place where you do most of your work and spend most of your time on the job. A new principal job location is a new place where you will work on a permanent, not temporary, basis. Also, the distance between your former home and a job location must be the shortest of the most commonly traveled routes between them.

If you are an employee, you must work full time for at least 39 weeks during the first year after your move in order to qualify for the deduction. The definition of full-time employment may vary according to your occupation. Seasonal workers are considered to be working full-time in the off-season if the off-season period is less than 6 months. For example, if you are a teacher on a 12-month work contract, you must teach for 6 months to be considered a full-time employee for the entire 12 months. It is important to note that you do not have to work for the same employer for all 39 weeks, nor do you have to work the weeks consecutively. You are also considered working during a week that you are temporarily absent from work due to illness, natural disaster, strikes, or a leave provided in your work contract or agreement. If you are self-employed, you must work full time for at least 39 weeks during the first year and at least 78 weeks during the first two years after your move.

The time test does not apply if your job ends because of disability, you are transferred for your employer’s benefit, or your employment is terminated for reason other than willful misconduct. Neither the time nor the distance tests apply if you are a member of the armed forces and your move is due to a permanent change of station. Different rules may also apply if you are a retiree or survivor moving into the United States from a foreign country or if you are moving to a foreign country for work reasons.

What’s Deductible?

If you meet the requirements, you can deduct the reasonable expenses of moving your household goods and personal effects from your old home to your new home. These include the cost of packing, crating, and transporting your property. You can also deduct the cost of storing and insuring your possessions for any period of 30 consecutive days after goods are taken from your old home and before they are delivered to your new home. It is important to note that you cannot deduct the costs of moving furniture or appliances you buy on the way to your new home.

The expense of traveling to your new home is also deductible. This includes transportation and lodging expenses incurred while traveling from your old home to your new home and on the day you arrive at your new home. You can deduct traveling expenses for only one trip to your new home for yourself and members of your household; however, you do not have to travel at the same time.

If you use your own car for your move, you can determine the total amount of your deductible travel expenses in one of two ways: 1) You can deduct your actual expenses, such as gas and oil for your car, if you keep an accurate record, a receipt, of each expense; or 2) You can use the standard mile rate, set at 19 cents per mile in 2008. Under either method, you may add all parking fees and tolls to the amount of the deduction. You cannot deduct any part of maintenance, repairs, or depreciation for your vehicle as a part of moving expenses.

If you are reimbursed by your employer for any of the above expenses, you must reduce your deduction by the amount of the reimbursement. If you decide to stop over or make side trips for sightseeing during your move, the costs of these additional expenses are not deductible. The costs of meals also do not qualify.

In today’s mobile society, you may at some point decide to move to a new city in order to take advantage of a better job opportunity. Be sure to consult your tax professional at that time to determine what expenses, if any, may be deducted from your taxes as a result of your job-related move.