LIFE INSURANCE. Estate Planning designing the legacy you envision

Transcription

1 LIFE INSURANCE Estate Planning designing the legacy you envision

2 Life. your way Strive to live your dreams. Discover the flexibility of life insurance protect, accumulate and transfer wealth now and in the future. Be free to live life, your way. The term estate planning means different things to different people. One meaning of estate planning is the creation of a legacy. This involves the accumulation of assets during your lifetime. A second aspect of estate planning is the process of determining who should inherit your assets and how they should inherit them. This step involves making personal choices and can involve drafting legal documents such as wills and trusts to communicate those wishes. Finally, estate planning can mean devising plans to reduce or eliminate federal and/or state income, estate or inheritance taxes. It may also involve utilizing strategies that help pay any taxes due from the transfer of assets. For affluent individuals, the most significant of these taxes is usually the federal estate tax. The federal estate tax is more commonly known as a transfer tax. It is a tax upon the transfer of property at death. Generally, federal estate tax is due and payable in cash within nine months of death. Estate tax law in effect at the time of death, the size of the estate and to whom the estate is transferred are the primary factors in determining whether or not your estate will be subject to tax. This document is intended to provide introductory information on the subject matter. MetLife does not provide tax and legal advice. You should consult your attorney and/or tax advisor before making financial or planning decisions.

3 Starting the planning process When it comes to something as important as planning for the disposition and preservation of your assets, you ll want to partner with a team of professionals and a company that can help to coordinate a sound estate plan. It is important to be able to trust the members of your team to listen to your concerns and help make informed decisions. The next step is to evaluate your present and future needs and desires, as well as those of family members. It may be helpful to make a list reflecting these aspirations. This list constitutes the basic building blocks for creating an estate plan. If you have already created a plan, compare it to these current concerns to see if the plan adequately meets them. IMPORTANT POINTS TO CONSIDER IN PLANNING YOUR ESTATE 1. Will: Have you made a will and been diligent in updating it to keep it consistent with current objectives and family changes? 2. Power of Attorney: Has sound management of assets been arranged if you are no longer able to perform this function? 3. Health Care Proxy: In the event of terminal illness, has health care been considered? Have you created a living will or health care proxy? 4. Property Distribution and Trusts: How will the distribution of property under the current estate plan affect your family? Will assets passing to beneficiaries be prudently managed? 5. Life Insurance: Has life insurance been purchased to meet your estate planning objectives? Have the benefits of irrevocable trusts been considered? 6. Charitable Giving: Does the current plan take advantage of charitable giving to support those causes most meaningful to you? 7. Business Interests: If you own a business, is the current plan designed to carry out your wishes regarding the succession or transfer of the business? 8. Preserving Wealth: Do you anticipate having a large enough estate to be subject to estate tax? If so, how does the current plan provide funding for this tax liability?

4 frequently asked questions BASIC QUESTIONS ABOUT TAXES AND FEES RELATED TO YOUR ESTATE What is probate? Probate is the legal process of administering the estate of the deceased by resolving all claims and distributing assets according to the terms of a valid will. If there is no valid will, then assets are passed through the state laws of intestacy (synonymous to a state-appointed will). Assets which pass outside a will, such as jointly held property with rights of survivorship or assets with specific beneficiary designations (pension plans or life insurance, for example), are not subject to probate. Probate costs include attorney s fees, executor s fees and court costs associated with distributing assets from a decedent s estate. They do not include federal or state estate taxes. In some estates, probate costs may be significant. How can I reduce probate costs? One way probate costs can be reduced is through the use of a funded revocable living trust. A revocable living trust is a trust which allows you to control the trust assets during your life (as trustee), but at death the trust distributes the trust property as directed outside the probate process. It is important to note that assets in a revocable living trust are still subject to state and federal estate tax as well as inheritance tax, if applicable. Do I need to be concerned about federal estate taxes? It depends. It is important to keep in mind that it is the law in effect at the time of death which determines estate tax liability. While one s estate may not be subject to an estate tax if they died today, the law in effect at the time of death may result in the estate being subject to tax. Under current law, an estate tax will be assessed against those estates in excess of $5,000,000 per person, indexed for inflation after This threshold is known as the applicable exclusion amount. Estate assets may be transferred to a surviving spouse who is a U.S. citizen without tax. A surviving spouse may also inherit any unused applicable exclusion amount. After these applicable exclusion amounts, remaining assets within an individual s estate may be taxed up to a maximum rate of 40%. The high applicable exclusion amounts should not deter you from preparing your assets, planning for business succession or developing a plan to pay for expenses associated with your death. While recent legislation made these limits permanent, the law may change at any time. It is better to have flexible plans in place than to defer planning altogether. It is important to consult with your professionals regarding which steps may be taken now to reduce estate tax exposure or prepare for future liquidity which may be needed for expenses, fees and taxes. Do I need to be concerned about state estate taxes? Most states have their own system of estate and inheritance taxes. These transfer costs should be taken into account when planning your estate. Many states have decoupled their estate tax procedures from the federal system. The result is that state exemptions may be much lower than federal exemptions (applicable exclusion amount). In many situations, this means that even if you owe no federal estate tax, you may still owe substantial state death tax. This issue is complex and varies from state to state so be sure to consult with your own tax advisor for its effect upon your situation. Does avoiding probate reduce estate taxes? No. Both probate and non-probate assets are subject to federal estate taxes, with rates as high as 40% from 2013 forward. Therefore, avoiding probate does not solve the estate tax problem. 2

5 ESTATE PLANNING FOR DIFFERENT FAMILY TYPES Do I need an estate plan if I am single? Estate planning may be even more important for single individuals. This is because married individuals can generally pass their entire estate to their spouse and defer payment of federal estate taxes until the death of the surviving spouse using the unlimited marital deduction. Many single people are unaware of available tax-saving strategies and the methods to properly pass assets to loved ones. A sound financial and estate plan can provide an element of control over your assets. Is there any special planning that a nontraditional couple needs to do? Marriage equality is still very much a work in progress even though the Supreme Court struck down a key provision of the Defense of Marriage Act. Recently, the Internal Revenue Service has recognized any legally performed marriage under state law, even if the couple no longer resides in the state where the marriage occurred. However, uncertainty still remains with respect to other agencies that have yet to act and with couples who are legally married under federal law residing in a state that does not recognize the marriage. Couples whose unions are not recognized are not afforded the same benefits as those who are. This includes LGBT couples as well as state common law marriages or other forms of domestic partnership. Therefore, it is extremely important to have certain documents in place at death or in the event of incapacity especially in the case of life support decisions. For taxes, special trust provisions may be drafted to address the lack of a marital deduction. The final implications of recent rulings are still being discussed. Opportunity and complexity may both be byproducts of change. Be sure to meet with your attorney, accountant and financial representative when preparing for your own situation. What planning steps should be taken if I have minor children/dependents? When beneficiaries are minors, special planning is often required. Leaving assets to minors is often impractical. Individuals with minor children are encouraged to work with an attorney to create a will naming a guardian. The will also should contain provisions for a testamentary trust to be created at death. This trust can hold the assets for the minor children and distribute them at the age of majority or an alternate specified date. This trust can be named as the beneficiary of assets such as IRAs, annuities and life insurance. Do I need particular planning if I have a special needs dependent? Parents or guardians of dependents with special needs will have different planning options and decisions from traditional estate planning. The most challenging of these is how to provide for the ongoing care of the child after your death. In some cases it is also important to structure the plan to provide for the child without disqualifying him or her from government benefits. An attorney specializing in estate planning for special needs beneficiaries is critical to ensure the plan meets your objectives and the future well-being of the child. The MetLife Center for Special Needs Planning can assist you, your financial professional and attorney in creating a plan. Are there any specific concepts that I should consider if my estate is particularly large or contains a closely held business? Perhaps. A large estate, or one that contains a closely held business (especially a family business) may benefit from certain advanced estate planning techniques. These techniques may include Family Limited Partnerships, Grantor Retained Trusts or Intentionally Defective Grantor Trusts. These techniques may help transfer a closely held business at a reduced transfer tax cost, but these techniques are complex and not for everyone. You should consult with independent counsel to determine whether any of these planning ideas are right for your estate plan. Will I have federal estate taxes if I am not a U.S. citizen? The world is a much smaller place these days. People are living on a more global scale. If either you or your spouse is not a U.S. citizen, or own property in other countries, different estate tax rules could apply. Citizenship and residency status could affect the property subject to estate tax, the applicable exclusion amount and the availability of the unlimited marital deduction. This means that, unlike a citizen couple who can defer taxes until the death of the second spouse, taxes may be due on the estate after the death of the first spouse. It is imperative to consult tax and legal advisors regarding the laws which apply to you if you or your spouse is not a U.S. citizen or owns property in other countries. 3

6 INFORMATION ON ADDITIONAL TAXES AND DEDUCTIONS What is Income in Respect of a Decedent and how will it affect my beneficiaries? IRD, or Income in Respect of a Decedent, is typically associated with assets such as IRAs, qualified plans or deferred annuities. IRD is income that would have been taxed to the deceased had he/she lived and taken distributions. Because these amounts were not taxed to the decedent before death, the recipient beneficiary must include the distributions in his or her gross income and pay the income tax due. It may be prudent to create provisions within your estate plan that provide an alternate source of liquidity to help pay such taxes for your beneficiaries. Do I still need to do estate planning if I give all my assets away before I die? If you have a large estate, it will be very difficult to give all assets away before you die without incurring a tax liability. This is because, in addition to the federal estate tax, there is also a federal gift tax and possible state gift tax. The gift tax is a tax on transfers that you make during your lifetime. Since the same tax rates apply to both lifetime transfers (gifts) and transfers at death, you can t avoid taxation by merely giving away all of your property before death. There are, however, certain amounts that can be given away that can completely avoid federal gift or estate taxation. The current annual gift exclusion allows an individual to give up to $14,000 per year per donee (person receiving the gift) without incurring federal gift or estate tax. If married, you and your spouse can give up to $28,000 annually per donee. Under present law (indexed for inflation after 2011) you can also give away up to $5,000,000 during your lifetime without paying any federal gift taxes. Will I get a gift or estate tax deduction for assets given to a charity today or left to charity at my death? For many, charitable donations are a way of giving back to the community. When charitable giving is done as part of your overall estate plan, there can be tax benefits. There are also many charitable giving strategies that provide benefits to the charity and your beneficiaries. If you are looking for a way to help your favorite charity, now is the time to consider making a gift of the following: Appreciated assets Personal property Life insurance Cash Each strategy offers its own unique advantages. Some of these advantages include: Income tax deduction Gift and/or estate tax deduction Avoidance of capital gains tax Lifetime income Charitable benefit 4

7 METHODS OF FUNDING POTENTIAL ESTATE LIABILITIES If my estate may be subject to federal estate taxes, what can I do to minimize that tax burden? 1. Utilize the Unlimited Marital Deduction, if applicable. The marital deduction allows you to pass as much as you want to your spouse (as long as he or she is a U.S. citizen) and no federal estate taxes will be due on the property until his or her subsequent death. 2. Take advantage of each spouse s Applicable Exclusion Amount. In addition to the assets that can pass tax free to a spouse, every person has the right to pass a specified amount of assets free from federal estate taxes to someone other than his or her spouse. This amount is referred to as the applicable exclusion amount. ($5,000,000 for those dying in 2011 indexed for inflation thereafter) A married couple can also utilize both spouse s applicable exclusion amounts through portability. The recent law permits any unused portion of the first spouse to die s exclusion to be transferred to, and used by, the surviving spouse. What if I properly plan my estate and there is still a cash deficit? Even if your estate is under the amount sheltered by the federal applicable exclusion amount, it may be subject to expenses. While federal estate taxes may be the biggest slice of these costs; state death taxes, administration costs and attorney s fees are some other financial liabilities that may be incurred. Having adequate cash at the time of death is essential. Life insurance can help provide that cash in a cost-effective way. Proper life insurance coverage can provide the cash needed income tax free and on time. Your financial professional can help analyze your estate, determine the potential expenses and find the best way to provide cash to fund any remaining costs. How can I make sure my estate has the cash it needs without increasing my estate and compounding the problem? Life insurance, which provides excellent estate liquidity, must be properly owned to avoid being included in your estate. Although life insurance death benefits are generally received income tax free, policy proceeds are subject to estate taxes if you own the policy at death. If the insurance is purchased and owned by a properly drafted irrevocable life insurance trust or by a third party, it should not be included in your estate for estate tax purposes. If the insurance is owned by you but transferred to a properly drafted trust or other third party more than three years before death, it is removed from your estate. What kind of life insurance is best for estate tax purposes? Generally, permanent insurance is used for estate planning since the need is long-term. Term insurance, which must be reapplied for and typically increases in cost after the specified period, is usually not the best product for this need. For married couples, survivorship life insurance could be the best option it insures both you and your spouse, and pays only one death benefit at the death of the second spouse. Because the death benefit is paid after the death of the second insured, the premiums are usually lower than if the policy insured a single life. For couples who can utilize the unlimited marital deduction for the majority of their estate planning needs, the cash is available exactly when needed for estate tax purposes. For single individuals, MetLife has several other permanent policies which vary in provisions such as the availability of death benefit guarantees and potential cash value accumulation. Your financial professional can help determine the type of policy that best meets your needs. 5 Please contact your financial professional for more information.

8 On January 13, 2013, the American Taxpayer Relief Act was signed into law. Among other things, the Act continues the Applicable Exclusion Amount of $5 million for federal estate tax purposes in 2011, indexed for inflation thereafter. Individuals must still evaluate with their tax, legal and financial professionals the potential impact of state death taxes on their estate. Individuals should also consult with their professionals regarding steps that can be taken now to reduce estate tax exposure or prepare for the future liquidity needed for expenses, fees and taxes. Prospectuses for Equity Advantage Variable Universal Life, and for the investment portfolios offered thereunder, are available from MetLife. The policy prospectus contains information about the policy s features, risks, charges and expenses. Investors should consider the investment objectives, risks, charges, expenses of the investment company carefully before investing. The investment objectives, risks and policies of the investment options, as well as other information about the investment options, are described in their respective prospectuses. You should read each applicable prospectus thoroughly and consider this information carefully before investing. Product availability and features may vary by state. Like most insurance policies, MetLife s policies contain charges, limitations, exclusions, termination provisions and terms for keeping them in force. Contact your financial representative for costs and complete details. Pursuant to IRS Circular 230, MetLife is providing you with the following notification: The information contained in this document is not intended to (and cannot) be used by anyone to avoid IRS penalties. This document supports the promotion and marketing of insurance products. You should seek advice from an independent tax advisor based on your particular circumstances. MetLife, its agents and representatives may not give tax or legal advice. Any discussion of taxes herein or related to this document is for general information purposes only and does not purport to be complete or cover every situation. Tax law is subject to interpretation and legislative change. Tax results and the appropriateness of any product for any specific taxpayer may vary. You should consult with and rely on your own independent legal and tax advisors regarding your particular set of facts and circumstances. Insurance Products: Not A Deposit Not FDIC-Insured Not Insured By Any Federal Government Agency Not Guaranteed By Any Bank Or Credit Union May Go Down In Value Metropolitan Life Insurance Company First MetLife Investors Insurance Company 200 Park Avenue New York, NY metlife.com MetLife Investors Distribution Company MetLife Investors USA Insurance Company 5 Park Plaza Suite 1900 Irvine, CA CLVL23531 L [1114] 2013 METLIFE, INC.