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Volume 14, Issue 4

Creative Insurance Solutions for Today's Mature Family

One of the more flexible and creative products to enter the insurance arena within recent years is survivorship life insurance. Often referred to as last-to-die or second-to-die, this life insurance policy insures two individuals yet provides only one death benefit payable at the death of the second insured. In many instances, survivorship life insurance may be less expensive than a single life insurance policy on one of the insureds. This is possible because the insurance risk is spread over the life expectancy of two lives rather than one. In fact, two individuals can be insured even if one is medically “uninsurable,” thus providing added security and planning potential for otherwise difficult situations.

Why Survivorship Life?

The advent of survivorship insurance has created several exciting opportunities, the most popular of which is the funding of estate taxes. Even with the appropriate wills, trusts, and property ownership, assets of married couples that exceed $4,000,000 (for 2008) may be subject to federal estate taxes (for single individuals, assets over $2,000,000 in 2008 are subject to estate taxes). For married couples, a survivorship life insurance policy can be an integral part of an estate plan.

For instance, suppose Peter and Kim Johnson (a hypothetical case) are both 60 years of age and have three adult children. The Johnsons’ net assets total $4,500,000. The Johnsons have updated and signed the appropriate legal documents (wills, trusts, etc.), and repositioned their asset ownership in order to maximize their respective applicable exclusion amount (formerly the unified credit). The potential exists for only $4,000,000 to pass to their heirs estate tax free. However, the remainder of their assets would be subject to incur federal estate taxes if they were to die in 2008 (excluding other administrative and funeral costs).

One solution to this problem would be to create an irrevocable trust to to purchase a survivorship life insurance policy on their lives. In this situation, the trust would be the owner and beneficiary of the policy, which would allow the policy proceeds to pass to the trust beneficiaries (Peter and Kim’s children) estate tax free. In addition, the Johnsons make a gift of the policy premiums to the trust by using their annual gift tax exclusions (without incurring a gift tax, individuals can gift up to $12,000 per year per donee to anyone they wish in 2008, while married couples can gift up to $24,000 per year).

Even if a couple does not foresee any estate tax problems, survivorship insurance can still be a dynamic method used to enhance any gifting or wealth transferring program. For instance, a survivorship life insurance policy can help provide wealth to children and grandchildren or potentially transform regular gifts to charity into a sizeable long-term gift.

Maintaining Continuity

The many uses of survivorship life insurance can result in a “win-win” situation for the insureds and their family. Whether you have an estate tax problem or merely wish to potentially leverage the value of any gifts you make to your children, grandchildren, or favorite charity, such an insurance plan can help provide maximum benefit for reasonable cost. A consultation with a qualified professional can best determine how a survivorship life insurance policy can fit into your overall estate plan.

The Four Forms of Co-Ownership

Owning property with another individual or partner may be a complex relationship. Because of the complexity, the way you agree to take title or ownership must be worked out in advance. Consulting with your legal professional can help you establish the ownership form in a way that will benefit you and your heirs. The four forms of co-ownership, one of which will be better suited for your particular particular circumstances, are as follows:

Tenancy in Common

Tenancy in common is a form of co-ownership often used between unrelated persons. Tenants in common may own unequal shares of property. For example, one person could own a one-fourth interest and another could own a three-fourths interest as tenants in common. If the shares of the co-owners are not specifically designated, they are presumed to be equal or proportionate.

Tenants in common are said to hold “undivided” interests with the other co-owners. This means each co-owner owns a proportionate interest in the entire property. For example, if two individuals are equal tenants in common to a parcel of land, it is incorrect to characterize one co-owner as owning the west half and the other as owning the east half. Rather, both co-owners own a one-half interest in the entire parcel.

Joint Ownership

Joint ownership is a specific type of co-ownership with some very unique legal characteristics. Unlike a tenancy in common, where co-owners may own unequal interests, the legal interest of each joint owner is equal to the interest of every other joint owner. For example, if there are three joint owners, each joint owner owns an equal, undivided, one third interest in the entire property. However, this proportionality does not necessarily carry over to the tax consequences of joint ownership.

The most important legal characteristic of a joint ownership is the right of survivorship. Right of survivorship means that when a joint owner dies, the surviving joint owner (or owners) automatically succeeds in ownership of the deceased joint owner’s interest in the property. For example, if there are two joint owners and one of them passes away, the surviving joint owner automatically owns the entire property. If there are three joint owners and one of them passes away, each of the two surviving joint owners automatically becomes one-half owner of the entire property. The survivorship rights of a joint owner are given precedence over the claims of the deceased joint owner’s creditors. This form of ownership may be common among married couples.

Tenancy by the Entirety

Tenancy by the entirety is recognized by many states as a variation of joint tenancy that applies only to joint ownership between spouses. This special form of joint ownership is called tenancy by the entirety. A tenancy by the entirety generally has the same legal characteristics of a joint ownership with a few additional features. Normally, the protection against the claims of creditors that applies to joint tenancies at the death of a joint tenant is also available against the lifetime creditors of the tenant by the entirety.

Community Property

Community property applies to married couples who own property in any of the following nine states: Arizona, California, Idaho, Louisiana, Nevada, New Mexico, Texas, Washington, and Wisconsin. Regardless of whose name is on any ownership papers, such as a deed, any property accumulated during the marriage is “owned” by both parties. This includes cash, real estate, and any other assets that may be acquired.

Remember, splitting property, for any reason, is generally a difficult task. Therefore, the decision to purchase property with another party is one that may require careful consideration.

Plastic Money Means Expanding Money

Imagine you are at an auction, and an antique lamp you love is about to come on the block. When you viewed the auction items earlier, you placed a value of $100 on the lamp. It is late in the auction, you have planned your bidding carefully, and you have exactly $100 in cash left in your wallet.

Price Equals Value

When the bidding reaches $90, you and one other bidder are still in the game. So, what is the likely outcome? If the bidding goes to $100, you will either get the lamp or drop out of the game. In this case, the amount of cash you have left equals the value you assigned to the lamp and effectively limits the amount you can pay. Assuming you are alone and cannot borrow some money from a friend, what you are willing and and able to pay is controlled by how much money you have in your pocket. In this example, we might say that “price equals value.”

Expanding Value

Let’s now modify the scenario slightly, and see how the outcome might change. Instead of it being late in the auction, this is one of the early items to go on the block, and it will be the first item on which you will bid. You have $500 in your wallet, the total amount you have allotted for the entire auction. The bidding has reached $90. What should you do? What are you likely to do?

Since you originally placed a value of $100 on the lamp, you should be be prepared to drop out if a $100 bid does not secure the lamp. However, unlike the first scenario, in which you only had $100 left, you have a full wallet. Depending on how much you want the lamp, it is possible that you would exceed your initial limit and continue bidding, particularly if you thought that a bid slightly over $100 might be successful. What’s the big deal about going over a little? After all, you may not even be successful on some other items of interest.

Although it’s probably not a “big deal” in this case, you have expanded your definition of ed your definition of value. What was originally a $100 value has been expanded to, perhaps, a $110 value. Notice how easy it is to lose one’s sense of value and have something that you want become become something that you feel you need.

The “Value” of Increased Buying Power

Okay, now let’s change the scene once more. This time, in addition to cash, the auction house will accept payment by credit card. What can happen to your sense of value when your buying power has been increased?

It appears that people may be less quality conscious in their buying behavior, may not negotiate as skillfully, and may pay more when buying by credit card than when making an identical purchase by cash. If the bidding were to surpass $100, it is quite likely that you would be willing to pay far more than your original assessment of what the lamp was worth.

This possibility suggests that “hard money” and “plastic money” carry different meanings. Hard money (i.e., actual dollars in your wallet or checking account) tends to be perceived as finite —when you run out of dollars, you’ve exhausted your buying power until you obtain more dollars. On the other hand, credit cards can expand your buying power up to the credit limit of the account.

The alluring aspect of being able to buy on credit can become transformed into an expanded sense of value. In the process, it is easy to lose track of the relationship between price and value, and to pay more than we know an object is worth. It is this changed sense of value that is, perhaps, the most concerning aspect of credit card purchases. We simply lose our sense of what a good deal is all about, and we become less smart about our shopping.

Buying on credit can be a great convenience, and it can make sense when we are temporarily short of cash. However, when buying on credit becomes our standard way of doing business, it can have some highly undesirable consequences. One way to guard against credit card abuse is to ask yourself two questions when making a credit card purchase: First, would you still purchase the item if you were paying cash? Second, would you pay the same price if paying by cash?

By keeping the focus on value, you can better distinguish between things you would like to get and and things you absolutely must have. Making this distinction can help you avoid the major pitfalls of buying on credit—overpaying on individual items and spending beyond your means.

Types of Tax Audits

While the purpose of all audits is to verify sources of income and validate deductions, exemptions, and credits, there are three basic types of IRS audits that vary in terms of comprehensiveness.

A correspondence audit involves involves a request from the IRS that you mail back proof of a particular item on your return. The IRS also uses this mail-based procedure to make adjustment audits—usually tax increases—based on calculations made by IRS computers. If the taxpayer accepts and pays the assessment notice, these audits usually end here. If the taxpayer believes the assessment is incorrect, he or she can challenge the notice by following the appropriate IRS procedures.

An office audit is a request that you is a request that you meet with a tax auditor at an IRS office. The notice usually identifies the aspect of your return in question and specifies the proper documentation needed to settle the audit.

A field audit is usually a little is usually a little more onerous, involving a meeting at your home or office with an IRS agent. In addition to reviewing supporting documentation for certain items on your return, the agent may be trying to evaluate whether your lifestyle is consistent with your reported income.

The best way to be prepared for the possibility of a tax audit is to keep well-organized records of your prior years’ returns, along with complete, supporting documentation.

The information provided is not written or intended as tax or legal advice and may not be relied on for purposes of avoiding any Federal tax penalties. Entities or persons distributing this information are not authorized to give tax or legal advice. Individuals are encouraged to seek advice from their own tax or legal counsel.

The information contained in this newsletter is for general use and it is not intended to cover all aspects of a particular matter. While we believe all information to be reliable and accurate, it is important to remember individual situations may be entirely different. Therefore, information should be relied upon only when coordinated with professional tax and financial advice. The publisher is not engaged in rendering legal, accounting, or financial advice. Neither the information presented nor any opinion expressed constitutes a representation by us or a solicitation of the purchase or sale of any securities. This newsletter is published by Liberty Publishing, Inc., Beverly, MA, Copyright © 2008.



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