By: Martin M. Shenkman, CPA, MBA, JD
How You (the Client/Customer) Can Get Hurt
Money Matters Radio – Estate Planning Checklist
By: Martin M. Shenkman, Esq.
Introduction/Overview: A client came in this past week that had been really hurt financially, from a tax perspective and estate planning perspective by one of her “advisers.” What happened to her is not uncommon and the lessons that can be learned will help everyone client/customer protect themselves.
Here’s what happened.
What was done wrong? How did she get hurt? Consider the following items?
√ Cancelling Old Insurance Policy: Never (read “NEVER”) cancel an old insurance policy until the new one is in place. She did and lucked out. You might not.
√ Why Cancel?: It can often make sense to cancel an old policy. You might have a policy with a company that is not doing well and prefer a better company. You might be in year 15 of a 20 year term policy and realize you need more than 5 years of future coverage. Sometimes new insurance can actually be cheaper. She cancelled a policy without understanding why and without being shown any analysis. That is always a sign of something wrong (i.e., a real sale not a purchase). If your adviser can’t or won’t explain a recommendation, get a new adviser!
√ No Sunlight: The new insurance agent convinced the client that it was NOT necessary to speak to her CPA, attorney or financial planner. Anyone that hides from sunlight and exposure is not someone you should do business with.
√ Violating Insurance Trust: The client was the one who set up the trust that owned the policy, not a beneficiary. She had no legal right to the money. You should never violate the terms of a legal document, aggressive interpretations might be one thing, but blatant violation is wrong. What if a disenfranchised child or other beneficiary got wind of it? (in this case a child from a prior marriage was a beneficiary of the trust but not included in the ownership of the new policy. You can see where that is going!
√ Gift Tax: The client took all the cash value from the insurance trust into her estate destroying the fact that that significant cash value had been removed through good planning outside her estate. She then made a gift to her kids by putting the policy in their names. She now has to file a gift tax return for re-gifting what was already outside her estate.
√ 3 Year Rule: If you transfer ownership of an insurance policy and die within three years of the transfer. If the existing trust had bought the new policy (assuming the new policy should have been purchased) this tax problem would have been avoided.
√ General Lessons:
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