INSURANCE OWNERSHIP AND TITLING PROPERTY ARE IMPORTANT

Question: I am 65 and my wife is 67. On the advice of my insurance agent and financial planner, an old family friend, I have owned several policies of insurance on my life with face values of $500,000 and have made my estate the beneficiary. I have been having some health problems of late and read somewhere that I shouldn't own these policies. While I don't want to go to a lawyer and spend all that money, I am beginning to have second thoughts and want to make sure that my wife and children receive the maximum benefit from my lifetime efforts. Can you give me some advice?

Answer: Yes. Because you have received bad advice from your longtime friend and insurance agent, you should pay a lawyer now or take the risk that your widow will pay lawyers and Uncle Sam much more later.

First, even though your wife is older than you by two years, statistically, she will outlive you by several years. Second, if you leave your insurance to your estate, when you die, the policy proceeds will become part of your estate and, depending on how your will is worded, may not pass to your spouse estate tax free. Third, some folks who do not believe they have taxable estates find -- often too late -- that life insurance can create a taxable estate. Depending on the value of your other assets and the way in which your will is worded, your assets may be subject to estate taxes which can consume 55% of your estate. We're sure this is not what you intended.

If you had received appropriate advice to begin with, you might have considered establishing an irrevocable insurance trust that would have owned and have been the beneficiary of your insurance policies. You could have chosen a trustee -- a relative, friend, bank, etc. -- who would have paid the premiums with money you or your wife gifted to the trust. At your death, the policy proceeds would have passed free of estate taxes into the trust. Then, based on the terms of the trust, the principal or interest could have been paid to your ultimate beneficiaries -- your wife, children, or others.

Your problem today is that if you transfer your policies into the trust, the proceeds will still be included in your estate if you die within three years from the date of the transfer. If your health is not good, this may not be a viable alternative, and you may want to make a gift of the policies to your wife who will then face the burden of planning.

Our advice: Seek competent legal assistance now. Whatever you do, don't rely on an insurance salesman for legal and tax advice. That's not to say that some agents are not trained in these areas. It is to say, however, that when you get this type of advice, you had best check it out with a lawyer experienced in this field while you still have options.

Question: I am nearly 70 and own title to all assets other than my wife's IRA. These assets include stocks we have owned for a long time, some real estate, and our home. Because of my advancing age, I have considered giving a half interest in all of these assets to my wife. Is this a good idea? And will there be any gift taxes due?

Answer: Generally speaking, when you make gifts of joint property interests to a spouse, because of the unlimited marital deduction, there are no gift or estate tax consequences; however, you may be creating unwanted income tax liabilities because the basis of the one-half of property transferred to a spouse will not be "stepped up" upon death of first spouse. This means that should the surviving spouse later sell the asset, he or she will incur a capital gains tax on that half interest. Other than avoiding probate -- which is far less expensive than the potential income tax ramifications, there are few advantages in creating joint property interests with your spouse.

Since each situation is different and since planning must be accomplished based on the specific facts peculiar to the individual couple, it is important that you and your spouse receive quality legal and tax advice in your locale.

Jan Collins Stucker is an award-winning writer and editor. Jan Warner is a matrimonial, elder, and tax attorney. Both are based in Columbia, South Carolina.

Please send your questions to P.O.Box 11704, Columbia, S.C. 29211 or send your questions by email to janwarner@nextsteps.net.