Have to Go to Probate to Get Access to POD Acct? Issues with USAA

[Carefreeap]

Hi All,

Another chapter in MIL's Estate/Trust Settlement.

DH called USAA this morning to find out what's going on with her USAA Accts. He has provided the Trust, Trust Certificate, Will and Death Certificate. He is the Executor, main Beneficiary of the Trust, Trustee and the named POD. Three accts totalling $14k. USAA is telling him he has to get letters of testamentry which means going to the probate court.

This seems crazy. I thought the whole point of a TOD acct was to avoid probate. Apparently they won't release funds without the direction of the executor but they won't just accept the will which names him executor. Is this normal?

[CuriousGeorgeTx]

We had a similar problem with Frost Bank after my father passed away. It was quite vexing because he had taken my sister and me into the branch and put on his account so this wouldn't happen. Turns out they put us on as agents, and our agency ended when he died. Not what he intended at all.

Everything else in his estate was neatly planned. His brokerage account (with Schwab) had a beneficiary agreement, and that worked like a charm. To sell his home, we used affidavits of heirship that were considerably less expensive than probate. But we had this one darn bank account.

Frost was willing to use the account to pay expenses of his estate, including utility bills and funeral expenses. We got the last ~$2 k out for use on settlement costs of selling his home.

Good luck.

[sailaway]

Are you saying there is a POD in the trust? That could be causing a conflict that requires such extreme resolution, as the trust didn't die.

[Carefreeap]

We had a similar problem with Frost Bank after my father passed away. It was quite vexing because he had taken my sister and me into the branch and put on his account so this wouldn't happen. Turns out they put us on as agents, and our agency ended when he died. Not what he intended at all.

Everything else in his estate was neatly planned. His brokerage account (with Schwab) had a beneficiary agreement, and that worked like a charm. To sell his home, we used affidavits of heirship that were considerably less expensive than probate. But we had this one darn bank account.

Frost was willing to use the account to pay expenses of his estate, including utility bills and funeral expenses. We got the last ~$2 k out for use on settlement costs of selling his home.

Good luck.

Was the account POD? When I was settling my dad's estate, all I had to do was provide the death certificate and a small estate affidavit but that was only for a few hundred dollars not $14k.

[CAsage]

I also thought POD/TOD avoided Probate! I also thought that as the Successor Trustee, there would be no probate needed. I would push harder with them, and escalate this. One of those has gotta be good enough! Good luck. Horrors.

[increment]

DH called USAA this morning to find out what's going on with her USAA Accts. He has provided the Trust, Trust Certificate, Will and Death Certificate. He is the Executor, main Beneficiary of the Trust, Trustee and the named POD. Three accts totalling $14k. USAA is telling him he has to get letters of testamentry which means going to the probate court.

This seems crazy. I thought the whole point of a TOD acct was to avoid probate. Apparently they won't release funds without the direction of the executor but they won't just accept the will which names him executor. Is this normal?

If the account was owned by a person and had beneficiaries named on it, then the trust and will are irrelevant, and no one should have brought them up.

If the account was owned by a person and had no beneficiaries named on it, then probate or its informal equivalent is required. If the estate is small enough, then the eligible person should submit the appropriate affidavits to USAA. (Was the deceased a Californian like you? The limit there is upwards of $150,000.) There is no need to provide any copy of any trust or will. If on the other hand the estate is not small enough, then it is necessary to go to court and obtain the letters testamentary. Note: no one is actually the legal executor until appointed by the court, so it is best not to use the term "executor." There is no need to provide the will to the brokerage. It is not their role to accept (or not accept) it. The letters provide the legal authority.

If the account was owned by a trust, then the current trustee needs to change the trust registration.

[DebiT]

I was told an account within a trust could not have TOD, here in California. And also that it couldn’t have POA. Due to a family complication involving terms of her trust, we are in process of helping my elderly mom transfer her investment account in the trust to a new one outside, which will now have TOD and will allow my DPOA. This turned out to be the cheapest easiest way to accomplish what she wants, given this just realized but long standing complication.

[Carefreeap]

DH called USAA this morning to find out what's going on with her USAA Accts. He has provided the Trust, Trust Certificate, Will and Death Certificate. He is the Executor, main Beneficiary of the Trust, Trustee and the named POD. Three accts totalling $14k. USAA is telling him he has to get letters of testamentry which means going to the probate court.

This seems crazy. I thought the whole point of a TOD acct was to avoid probate. Apparently they won't release funds without the direction of the executor but they won't just accept the will which names him executor. Is this normal?

If the account was owned by a person and had beneficiaries named on it, then the trust and will are irrelevant, and no one should have brought them up.

If the account was owned by a person and had no beneficiaries named on it, then probate or its informal equivalent is required. If the estate is small enough, then the eligible person should submit the appropriate affidavits to USAA. There is no need to provide any copy of any trust or will. If on the other hand the estate is not small enough, then it is necessary to go to court and obtain the letters testamentary. Note: no one is actually the legal executor until appointed by the court, so it is best not to use the term "executor." There is no need to provide the will to the brokerage. It is not their role to accept (or not accept) it. The letters provide the legal authority.

If the account was owned by a trust, then the current trustee needs to change the trust registration.

Bank accounts were owned by the individual and they were not part of the Trust. DH is the named TOD beneficiary. No brokerage accounts at USAA.

USAA asked for copies of the Death Certificate, Will and Trust and wanted direction from the Executor to disburse the TOD account. It's very possible that DH introduced himself as beneficiary, executor and Trustee thus triggering the request for documents.

Total estate, including Trust assets, is about $1.2M. Assets outside the Trust are probably around $15k. House and Brokerage (at Fidelity) are titled in the Trust. Fidelity was a dream to work with.

[stan1]

USAA asked for copies of the Death Certificate, Will and Trust and wanted direction from the Executor to disburse the TOD account. It's very possible that DH introduced himself as beneficiary, executor and Trustee thus triggering the request for documents.

This should not be necessary, only the death certificate. That's the point of a POD account.

I suspect DH over volunteered information. He could call back and try to reset, but may not be possible to reset what is already in motion in a risk adverse world. Maybe someone at USAA will have the authority and willingness to reset this.

[Luckywon]

If DH files a FINRA complaint I predict the matter will be resolved in a few days.

[Big Dog]

Does the state in question have a small estate exemption to probate? While I haven't dealt with USAA, when I processed my parents stuff, the broker/bank also asked me to complete a CA notarized form that said that their estate was exempt from Probate. (As nearly everything was in the Trust, or PoD/ToD, the amount of cash remaining was small.). It was a PIA for a ToD account, but for a $10 notary fee, it made things easier for them to check the box.

For example,
https://saclaw.org/wp-content/uploads/2 ... operty.pdf

[cheese_breath]

Hi All,

Another chapter in MIL's Estate/Trust Settlement.

DH called USAA this morning to find out what's going on with her USAA Accts. He has provided the Trust, Trust Certificate, Will and Death Certificate. He is the Executor, main Beneficiary of the Trust, Trustee and the named POD. Three accts totalling $14k. USAA is telling him he has to get letters of testamentry which means going to the probate court.

This seems crazy. I thought the whole point of a TOD acct was to avoid probate. Apparently they won't release funds without the direction of the executor but they won't just accept the will which names him executor. Is this normal?

I didn't read any farther, but I see a couple issues.

First, a will doesn't name an executor. It nominates an executor. The nomination needs to be approved by the court before it becomes official.

Second, the executor has no authority over the trust. That's the trustee's job. Is DH the trustee?

[Lee_WSP]

Is it normal, no, most banks just transfer it with the death certificate.

Is it a best practice for a bank? Actually, probably in today's world. I personally feel it's way too simple for that POD account to bypass creditors and tax authorities.

That said, no, not normal, but nothing you can do about it either.

Look into small estate procedures in your state.

[Luckywon]

Is it normal, no, most banks just transfer it with the death certificate.

Is it a best practice for a bank? Actually, probably in today's world. I personally feel it's way too simple for that POD account to bypass creditors and tax authorities.

That said, no, not normal, but nothing you can do about it either.

Look into small estate procedures in your state.

If there were creditors is there any legal exposure for a bank if it has released the funds to POD beneficiaries?

[Lee_WSP]

Is it normal, no, most banks just transfer it with the death certificate.

Is it a best practice for a bank? Actually, probably in today's world. I personally feel it's way too simple for that POD account to bypass creditors and tax authorities.

That said, no, not normal, but nothing you can do about it either.

Look into small estate procedures in your state.

If there were creditors is there any legal exposure for a bank if it has released the funds to POD beneficiaries?

They could be named or subpoenaed, but no. I’m not aware of any other risks which is why it’s unusual to require the executors consent.

[Luckywon]

Is it normal, no, most banks just transfer it with the death certificate.

Is it a best practice for a bank? Actually, probably in today's world. I personally feel it's way too simple for that POD account to bypass creditors and tax authorities.

That said, no, not normal, but nothing you can do about it either.

Look into small estate procedures in your state.

If there were creditors is there any legal exposure for a bank if it has released the funds to POD beneficiaries?

They could be named or subpoenaed, but no. I’m not aware of any other risks which is why it’s unusual to require the executors consent.

Thanks for your insight.

[Carefreeap]

Hi All,

Another chapter in MIL's Estate/Trust Settlement.

DH called USAA this morning to find out what's going on with her USAA Accts. He has provided the Trust, Trust Certificate, Will and Death Certificate. He is the Executor, main Beneficiary of the Trust, Trustee and the named POD. Three accts totalling $14k. USAA is telling him he has to get letters of testamentry which means going to the probate court.

This seems crazy. I thought the whole point of a TOD acct was to avoid probate. Apparently they won't release funds without the direction of the executor but they won't just accept the will which names him executor. Is this normal?

I didn't read any farther, but I see a couple issues.

First, a will doesn't name an executor. It nominates an executor. The nomination needs to be approved by the court before it becomes official.

Second, the executor has no authority over the trust. That's the trustee's job. Is DH the trustee?

Thank you. I didn't realize the executor had to be approved by the court.

DH is the Trustee and the main beneficiary. I'm the only other named beneficiary and it's limited to her jewelry. He's an only child so a lot of this is simply shifting from one pocket to another. We're also trying to minimize the size of the estate since OR has such a low threshold for estate tax at $1M.

[Carefreeap]

So good news, somehow things have worked out and DH is supposed to get the POD funds by Friday.

He's been fixiated on trying to get the day of death value for the estate but USAA won't release the info without the testamentry letter but I told him don't worry about that since he has the bank statements in her name already for August. These are no or low interest bearing accounts.

Next up...transferring the car title and registration.

[chemocean]

He's been fixiated on trying to get the day of death value for the estate but USAA won't release the info without the testamentry letter but I told him don't worry about that since he has the bank statements in her name already for August. These are no or low interest bearing accounts.

It seems that your DH was acting as executor to get the value of the account to file tax returns. Since executor needs to be appointed by the county official, he would need to probate the will and be assigned the executor.

It seems that the transfer of the account to your DH as an individual POD went accordingly. I agree with others on this thread that that your DH introduced a red herring submitting trust documents. Incidentally, many financial institutions require that the POD establish an individual account at their institution, to provide legal identification, before the POD is allowed to transfer the account.

[Katietsu]

Have you talked to a lawyer or researched probate or probate alternatives in the state of the deceased? It took me 10 minutes to fill out the forms and 10 minutes to get the short certificates when my parent died. I know every state is different. I just would want to make sure there was a reason for DH to try to handle it all without an official appointment of executor.

[Carefreeap]

He's been fixiated on trying to get the day of death value for the estate but USAA won't release the info without the testamentry letter but I told him don't worry about that since he has the bank statements in her name already for August. These are no or low interest bearing accounts.

It seems that your DH was acting as executor to get the value of the account to file tax returns. Since executor needs to be appointed by the county official, he would need to probate the will and be assigned the executor.

It seems that the transfer of the account to your DH as an individual POD went accordingly. I agree with others on this thread that that your DH introduced a red herring submitting trust documents. Incidentally, many financial institutions require that the POD establish an individual account at their institution, to provide legal identification, before the POD is allowed to transfer the account.

Yes, he wants the info for both tax return as well as documentation for the OR estate tax. The CPA, who specializes in Trusts, estates et cetera, is encouraging him to try the "one and done" approach. Apparently he's allowed to file one return if everything is settled within 9 months of MIL's passing. Since the intention is to sell the house, it's possible he can choose that route at Trustee.

And yes, we've had accounts with USAA for years.

[Carefreeap]

Have you talked to a lawyer or researched probate or probate alternatives in the state of the deceased? It took me 10 minutes to fill out the forms and 10 minutes to get the short certificates when my parent died. I know every state is different. I just would want to make sure there was a reason for DH to try to handle it all without an official appointment of executor.

Yes, he's been working with the Estate lawyer used to prepare the Will, Trusts, POAs et cetera. He doesn't think DH needs to do anything since everythng was set up in the Trust or POD. But, as he says, the financial instutions are making it more difficult so to keep that in mind.

At this point we think we have everything covered except for the car. TBD. It's named in the Trust but not titled. He's going to the Oregon DMV today.

[SuzBanyan]

Hi All,

Another chapter in MIL's Estate/Trust Settlement.

DH called USAA this morning to find out what's going on with her USAA Accts. He has provided the Trust, Trust Certificate, Will and Death Certificate. He is the Executor, main Beneficiary of the Trust, Trustee and the named POD. Three accts totalling $14k. USAA is telling him he has to get letters of testamentry which means going to the probate court.

This seems crazy. I thought the whole point of a TOD acct was to avoid probate. Apparently they won't release funds without the direction of the executor but they won't just accept the will which names him executor. Is this normal?

I didn't read any farther, but I see a couple issues.

First, a will doesn't name an executor. It nominates an executor. The nomination needs to be approved by the court before it becomes official.

Second, the executor has no authority over the trust. That's the trustee's job. Is DH the trustee?

Thank you. I didn't realize the executor had to be approved by the court.

DH is the Trustee and the main beneficiary. I'm the only other named beneficiary and it's limited to her jewelry. He's an only child so a lot of this is simply shifting from one pocket to another. We're also trying to minimize the size of the estate since OR has such a low threshold for estate tax at $1M.

Isn’t it too late to minimize the size of the estate once your mother in law has passed? I’m not familiar with the OR estate tax, many such laws, such as the federal state tax, count assets owned at death even if the assets is transferred on death without the probate process.

[LotsaGray]

Hi All,

Another chapter in MIL's Estate/Trust Settlement.

DH called USAA this morning to find out what's going on with her USAA Accts. He has provided the Trust, Trust Certificate, Will and Death Certificate. He is the Executor, main Beneficiary of the Trust, Trustee and the named POD. Three accts totalling $14k. USAA is telling him he has to get letters of testamentry which means going to the probate court.

This seems crazy. I thought the whole point of a TOD acct was to avoid probate. Apparently they won't release funds without the direction of the executor but they won't just accept the will which names him executor. Is this normal?

I didn't read any farther, but I see a couple issues.

First, a will doesn't name an executor. It nominates an executor. The nomination needs to be approved by the court before it becomes official.

Second, the executor has no authority over the trust. That's the trustee's job. Is DH the trustee?

Thank you. I didn't realize the executor had to be approved by the court.

DH is the Trustee and the main beneficiary. I'm the only other named beneficiary and it's limited to her jewelry. He's an only child so a lot of this is simply shifting from one pocket to another. We're also trying to minimize the size of the estate since OR has such a low threshold for estate tax at $1M.

TOD/POD does not remove those dollars from the estate. Nor does moving into most (all?) trusts. Frankly, when person dies it is too late to affect the size of their estate. Few ways to tweak taxes if successor disclaim and next in line are charities.

Keep in mind the instant someone dies “they” no longer have assets. They just went to the estate unless it went to a beneficiary. TOD is not a beneficiary.

Just because something bypasses probate (though stuff doesn’t get probated the will does) does not mean it is not included in estate value.

[bsteiner]

She had a $1.2 million estate, in Oregon where the state estate tax exempt amount is $1 million, and not in California.

The key issue should have been providing for her children or other beneficiaries in trust rather than outright in her Will, to keep their inheritances out of their estates for estate tax purposes, and to protect their inheritances from their creditors and spouses, and Medicaid.

Why was she instead concerned about whether her Will would be probated? She went to all that effort to set up TOD designations, while missing the more important issues. She wasn't in California, and she wouldn't be the one to fill out the forms. How much work is it to probate a Will in Oregon? Obviously you wouldn't want to do it for one small account (does Oregon have a small estate procedure that you could use?), but in the context of a $1.2 million estate is it significant?

[MBB_Boy]

Is it normal, no, most banks just transfer it with the death certificate.

Is it a best practice for a bank? Actually, probably in today's world. I personally feel it's way too simple for that POD account to bypass creditors and tax authorities.

That said, no, not normal, but nothing you can do about it either.

Look into small estate procedures in your state.

If there were creditors is there any legal exposure for a bank if it has released the funds to POD beneficiaries?

They could be named or subpoenaed, but no. I’m not aware of any other risks which is why it’s unusual to require the executors consent.

Regulatory risk if against procedure. OCC doesn't need someone to file a lawsuit to issue fines

[Carefreeap]

Hi All,

Another chapter in MIL's Estate/Trust Settlement.

DH called USAA this morning to find out what's going on with her USAA Accts. He has provided the Trust, Trust Certificate, Will and Death Certificate. He is the Executor, main Beneficiary of the Trust, Trustee and the named POD. Three accts totalling $14k. USAA is telling him he has to get letters of testamentry which means going to the probate court.

This seems crazy. I thought the whole point of a TOD acct was to avoid probate. Apparently they won't release funds without the direction of the executor but they won't just accept the will which names him executor. Is this normal?

I didn't read any farther, but I see a couple issues.

First, a will doesn't name an executor. It nominates an executor. The nomination needs to be approved by the court before it becomes official.

Second, the executor has no authority over the trust. That's the trustee's job. Is DH the trustee?

Thank you. I didn't realize the executor had to be approved by the court.

DH is the Trustee and the main beneficiary. I'm the only other named beneficiary and it's limited to her jewelry. He's an only child so a lot of this is simply shifting from one pocket to another. We're also trying to minimize the size of the estate since OR has such a low threshold for estate tax at $1M.

Isn’t it too late to minimize the size of the estate once your mother in law has passed? I’m not familiar with the OR estate tax, many such laws, such as the federal state tax, count assets owned at death even if the assets is transferred on death without the probate process.

As I understand it some expenses will be deductible from the gross estate such as administration, tax prep, sales costs et cetera. Also I think the interest on the smallish mortgage until the house is sold. We are working with an attorney and CPA.

[Carefreeap]

Hi All,

Another chapter in MIL's Estate/Trust Settlement.

DH called USAA this morning to find out what's going on with her USAA Accts. He has provided the Trust, Trust Certificate, Will and Death Certificate. He is the Executor, main Beneficiary of the Trust, Trustee and the named POD. Three accts totalling $14k. USAA is telling him he has to get letters of testamentry which means going to the probate court.

This seems crazy. I thought the whole point of a TOD acct was to avoid probate. Apparently they won't release funds without the direction of the executor but they won't just accept the will which names him executor. Is this normal?

I didn't read any farther, but I see a couple issues.

First, a will doesn't name an executor. It nominates an executor. The nomination needs to be approved by the court before it becomes official.

Second, the executor has no authority over the trust. That's the trustee's job. Is DH the trustee?

Thank you. I didn't realize the executor had to be approved by the court.

DH is the Trustee and the main beneficiary. I'm the only other named beneficiary and it's limited to her jewelry. He's an only child so a lot of this is simply shifting from one pocket to another. We're also trying to minimize the size of the estate since OR has such a low threshold for estate tax at $1M.

TOD/POD does not remove those dollars from the estate. Nor does moving into most (all?) trusts. Frankly, when person dies it is too late to affect the size of their estate. Few ways to tweak taxes if successor disclaim and next in line are charities.

Keep in mind the instant someone dies “they” no longer have assets. They just went to the estate unless it went to a beneficiary. TOD is not a beneficiary.

Just because something bypasses probate (though stuff doesn’t get probated the will does) does not mean it is not included in estate value.

Yeah, I had to kind of wrap my head around "estate" meaning gross estate for taxation purposes vs what might be probated as a small estate. According to the attorney, if the bank was giving DH a hard enough time he could file a small estate affidavit just for the bank accounts since everything was either in the Trust or passing via POD.

[Carefreeap]

She had a $1.2 million estate, in Oregon where the state estate tax exempt amount is $1 million, and not in California.

The key issue should have been providing for her children or other beneficiaries in trust rather than outright in her Will, to keep their inheritances out of their estates for estate tax purposes, and to protect their inheritances from their creditors and spouses, and Medicaid.

Why was she instead concerned about whether her Will would be probated? She went to all that effort to set up TOD designations, while missing the more important issues. She wasn't in California, and she wouldn't be the one to fill out the forms. How much work is it to probate a Will in Oregon? Obviously you wouldn't want to do it for one small account (does Oregon have a small estate procedure that you could use?), but in the context of a $1.2 million estate is it significant?

Hi Bruce and thanks for chiming in.

Everything was set up in the Trust or was POD. The issue was USAA insisting that the executor direct USAA to pay the POD. That was going to involve getting the letters testementry from the probate court which seemed crazy. We were only talking about $14k in bank assets.

For practical purposes I think the issue is resolved. DH is supposed to be getting the money by Friday. He can't get the day of death value from USAA for estate tax purposes but as I keep reminding him he can figure it out just looking at a statement. He's fixated on getting an "offical statement" from the bank and he's just got to deal with the fact it's not worth the trouble.

Oregon's small estate limit is $75k so the accounts and even the car (which is named in the Trust but not titled in the Trust) is well below the small estate limit.

[senex]

Yeah, I had to kind of wrap my head around "estate" meaning gross estate for taxation purposes vs what might be probated as a small estate.

Yes, this point seems to catch many people unaware. I don't recall seeing any clear explanation in introductory books (like Nolo Press etc) or in state government docs, which is a significant oversight by all those publishers.

"Estate" has several very different meanings, depending on context.

In the context of estate tax, it means everything owned (or effectively owned/controlled) by the person the moment before he died. It includes all assets, all accounts, Revocable Living Trust assets, etc, regardless of whether they have beneficiary/tod/pod designations. (the idea of what it means to "own" joint property gets complicated, and is a whole other discussion).

In the context of probate, it means only the assets that need to go through state-overseen estate administration -- which, in my limited experience, is only things that have some kind of title/registration in the deceased name AND won't be directly retitled due to joint tenancy, beneficiary/tod, etc. And officially it probably includes "personal property," but I think most people's household effects are rarely worth enough to bother with anything official.

It's pretty easy to have a, say, $1m estate (for estate tax purposes) that is $0 or nearly $0 for probate purposes. Estate tax is potentially due even if the "probate estate" is $0.

[Lee_WSP]

An estate is everything you own. Period. You have an estate while alive. It’s why we conserve the estate in a conservatorship. You just need to look at the definition of the word to understand the meaning.

Probate estate is used to denote that portion subject to probate. Taxable slices of that portion which is taxable. By itself its proper use is as defined. Everything you own.

[Luckywon]

In the context of estate tax, it means everything owned (or effectively owned/controlled) by the person the moment before he died. It includes all assets, all accounts, Revocable Living Trust assets, etc, regardless of whether they have beneficiary/tod/pod designations. (the idea of what it means to "own" joint property gets complicated, and is a whole other discussion).

My understanding is also includes life insurance policies owned by the decedent. So if the decedent owns a $1 million term policy, that would be part of the estate for estate tax purposes.(There are workarounds but have to be planned well in advance.)

[LotsaGray]

In the context of estate tax, it means everything owned (or effectively owned/controlled) by the person the moment before he died. It includes all assets, all accounts, Revocable Living Trust assets, etc, regardless of whether they have beneficiary/tod/pod designations. (the idea of what it means to "own" joint property gets complicated, and is a whole other discussion).

My understanding is also includes life insurance policies owned by the decedent. So if the decedent owns a $1 million term policy, that would be part of the estate for estate tax purposes.(There are workarounds but have to be planned well in advance.)

Life insurance death benefit is generally not taxable. Neither income tax nor estate tax.

[Luckywon]

In the context of estate tax, it means everything owned (or effectively owned/controlled) by the person the moment before he died. It includes all assets, all accounts, Revocable Living Trust assets, etc, regardless of whether they have beneficiary/tod/pod designations. (the idea of what it means to "own" joint property gets complicated, and is a whole other discussion).

My understanding is also includes life insurance policies owned by the decedent. So if the decedent owns a $1 million term policy, that would be part of the estate for estate tax purposes.(There are workarounds but have to be planned well in advance.)

Life insurance death benefit is generally not taxable. Neither income tax nor estate tax.

With respect to estate tax, I certainly hope you are wrong, because if you are right our trust and estate attorney is probably guilty of malpractice. He informed us life insurance policies are in the estate for estate tax purposes if owned by the decedent, or the premiums were being paid by the decedent.

As a workaround, he placed my life insurance policy in an irrevocable life insurance trust, which was not a trivial matter for several reasons.

He also mentioned if I died within three years of creating the ILIT, the life insurance proceeds would still be in the estate because there is a 3 year "look-back". Fortunately, that is now moot.

[Lee_WSP]

In the context of estate tax, it means everything owned (or effectively owned/controlled) by the person the moment before he died. It includes all assets, all accounts, Revocable Living Trust assets, etc, regardless of whether they have beneficiary/tod/pod designations. (the idea of what it means to "own" joint property gets complicated, and is a whole other discussion).

My understanding is also includes life insurance policies owned by the decedent. So if the decedent owns a $1 million term policy, that would be part of the estate for estate tax purposes.(There are workarounds but have to be planned well in advance.)

Life insurance death benefit is generally not taxable. Neither income tax nor estate tax.

That's not correct. It's part of your estate. It's not income though.

[LotsaGray]

Are you saying a 5mil term life policy death benefit paid to your kids as beneficiaries would increase the taxable value of your estate by $5mil? Let’s assume the balance of your taxable estate is $20mil so we are above fed exclusion.

I am and have specifically referred to death benefit not any sort of built up cash value from permanent insurance.

[Luckywon]

Are you saying a 5mil term life policy death benefit paid to your kids as beneficiaries would increase the taxable value of your estate by $5mil? Let’s assume the balance of your taxable estate is $20mil so we are above fed exclusion.

I am and have specifically referred to death benefit not any sort of built up cash value from permanent insurance.

Per what our trust and estates attorney told us, yes it would. Unless the decedent did not own the policy, or pay its premiums, at or within 3 years of death.

[Lee_WSP]

Are you saying a 5mil term life policy death benefit paid to your kids as beneficiaries would increase the taxable value of your estate by $5mil? Let’s assume the balance of your taxable estate is $20mil so we are above fed exclusion.

I am and have specifically referred to death benefit not any sort of built up cash value from permanent insurance.

Yes.

https://www.law.cornell.edu/uscode/text/26/2031

[bsteiner]

Are you saying a 5mil term life policy death benefit paid to your kids as beneficiaries would increase the taxable value of your estate by $5mil? Let’s assume the balance of your taxable estate is $20mil so we are above fed exclusion.

I am and have specifically referred to death benefit not any sort of built up cash value from permanent insurance.

Per what our trust and estates attorney told us, yes it would. Unless the decedent did not own the policy, or pay its premiums, at or within 3 years of death.

If you own the policy, or if you have any "incidents of ownership" over the policy, it's in your estate for estate tax purposes.

If you give it away and live for 3 years, and don't retain any "incidents of ownership" over the policy, it's not in your estate for estate tax purposes, though the value of the policy as of the date of the gift is a gift.

The reason for the 3-year rule is that an insurance policy is worth more upon death than during lifetime, so a person who knows he/she is in very poor health could otherwise give away the policy and try to value the policy for gift tax purposes as if he/she were in good health.

Paying premiums isn't relevant other than if you give it away and then pay premiums, your premium payments are treated as gifts, which (depending on the terms of the trust) may or may not qualify for the gift tax annual exclusion with respect to the beneficiaries.

Of course, with the current level of the estate tax exclusion amount, there are very few people rich enough to pay estate tax but poor enough to need life insurance. So we're creating very few insurance trusts these days. I did one recently for someone with a noncitizen spouse who has $5 million of insurance and is buying another $5 million of insurance. Most of our insurance trusts are legacy trusts from when the estate tax exclusion amount was much lower. The tricky issue with insurance trusts is whether to elect automatic allocation of GST exemption or to elect not to have automatic allocation of GST exemption. It gets very complicated when people don't affirmatively elect one way or the other.

[Luckywon]

Paying premiums isn't relevant other than if you give it away and then pay premiums, your premium payments are treated as gifts, which (depending on the terms of the trust) may or may not qualify for the gift tax annual exclusion with respect to the beneficiaries.

Ah, thank you for that clarification on the significance of paying the premiums.