You can lower your beneficiaries' estate tax burden by making sure you don't own your life insurance policy when you die.
First things first: You don't have to read this article unless your estate is likely to owe federal estate taxes at your death. Currently, the estate tax affects only people who die leaving a taxable estate of more than a million dollars.
For those estates that do owe taxes, whether or not life insurance proceeds are included in the taxable estate depends on who owns the policy when the insured person dies. If the deceased person owned the policy, the full amount of the proceeds are included in the federal taxable estate; if someone else owned the policy, the proceeds are not included.
Example
Melissa buys an insurance policy covering her life, with a face value of $200,000. Her son Jeff is the beneficiary. Melissa's business partner, Juanita, buys a second policy, also covering Melissa's life, for $400,000, payable to Juanita. (She will use the proceeds to buy Melissa's half of the business after Melissa dies and leaves it to Jeff.)
Melissa dies. All the proceeds of Melissa's policy, $200,000, are included in her federal taxable estate. However, none of the $400,000 from the policy Juanita owns is part of Melissa's federal taxable estate, because Melissa did not own the policy.
It follows that if you want your life insurance proceeds to avoid federal estate tax, you may wish to transfer ownership of your life insurance policy to another person or entity. There are two ways to do it. You can transfer ownership of your policy to any other adult, including the policy beneficiary. Or, you can create an irrevocable life insurance trust, and transfer ownership to it. (But be aware that some group policies, which many people participate in through work, don't allow you to transfer ownership at all.)
Method One: Transferring Ownership to Other People
Transferring ownership of your policy to another person involves a trade-off: Once the policy is transferred, you've lost all your power over it, forever. You cannot cancel it or change the beneficiary. Suppose, for example, you transfer ownership of your policy to your spouse, and later get divorced. You cannot cancel the policy or recover it from your ex-spouse. In many situations, however, these gifts work well -- for example, when you transfer policy ownership to an adult child with whom you have a close and loving relationship.
IRS Rules Governing Life Insurance Transfers
The IRS has rules that determine who owns a life insurance policy when the insured person dies. Gifts of life insurance policies made within three years of death are disallowed for federal estate tax purposes -- and often for state death tax purposes, too. This means that the full amount of the proceeds are included in your estate, as if you had remained owner of the policy.
Example
Louise gives her $300,000 term life insurance policy to her friend, Leon. She dies two years later. For federal estate tax purposes, the gift is disallowed, and all of the proceeds, $300,000, are included in Louise's taxable estate. If Louise had transferred the life insurance policy more than three years before her death, none of the proceeds would have been included in her taxable estate.
The message here is obvious: If you want to give away a life insurance policy to reduce estate taxes, give the policy away as soon as is feasible. (And then don't die for at least three years.)
Another IRS regulation provides that a deceased person who kept any "incidents of ownership" of a transferred life insurance policy is still considered the owner. The term "incidents of ownership" is simply legalese for significant power over the transferred insurance policy. Specifically, the proceeds of the policy will be included in your taxable estate if you have the legal right to do any one of the following:
* change or name beneficiaries of the policy
* borrow against the policy, pledge any cash reserve it has or cash it in
* surrender, convert or cancel the policy, or
* select a payment option -- that is, decide if payments to the beneficiary can be a lump sum or in installments.
Gift Tax Concerns
If you transfer a life insurance policy to a beneficiary, tax authorities regard the transaction as a gift. Under current gift tax rules, if you transfer a policy with a present value of more than $11,000 to another person, gift taxes will be assessed. However, the gift tax won't have to be paid until your death. And keep in mind that the amount of gift tax will be far less than the amount of estate tax that would be due if your policy remained in your name and in your estate. This is because the policy proceeds (the amount the insurance company pays at death) are always considerably more than the value of the policy while the insured is alive. To find out the present worth of an insurance policy for gift tax purposes, ask your insurance company.
Example
Eugene transfers ownership of his universal life insurance policy to his son, David. The value of the policy when he transfers it is $22,000. Under IRS rules, $11,000 of this is subject to gift tax. Eugene dies four years later, and the insurance policy pays $300,000. None of this $300,000 is included in Eugene's federal taxable estate. (Nor are the proceeds considered income to David, for federal income tax purposes.)
The Nuts and Bolts of Transferring Ownership
You can give away ownership of your life insurance policy by signing a simple document, called an "assignment" or a "transfer." To do this, notify the insurance company, and use its form. There's normally no charge to make the change. Also, you usually have to change the policy itself to specify that the insured is no longer the owner.
After the policy is transferred, the new owner should make any premium payments due. If you make payments, the IRS might contend that you're keeping an "incident of ownership" (as discussed above) and include the proceeds in your federally taxable estate -- precisely what you're trying to avoid. If the new owner can't make the payments, you can give her money for them.
If you give a paid-for single-premium policy to a new owner, there are no future payments to worry about. Because it's paid for in full once it's purchased, single-premium life can be a particularly convenient type of policy to give away. However, there can be a drawback here, too. If the value of the policy at the time of the gift exceeds the amount that is exempt from gift tax (currently, $11,000), the IRS will assess gift tax on the excess amount. By contrast, if you transfer ownership of a policy that has premiums due each year, and then every year you give the recipient a gift of less than $11,000 to pay for those premiums, no gift tax will be assessed.
Method Two: Life Insurance Trusts
The second way to transfer a life insurance policy is to create an irrevocable life insurance trust and then hold the policy in trust. Once you transfer ownership of life insurance to the trust, you're no longer the owner, and the proceeds won't be part of your estate.
Why create a life insurance trust, rather than simply transfer a life insurance policy to someone else? One reason can be that there's no one you want to give your policy to. In other words, you want to get the proceeds out of your taxable estate, but you want to exert legal control over the policy and avoid the risks of having an insurance policy on your life owned by someone else -- perhaps a spouse or child you don't trust to pay policy premiums. For example, the trust could specify that the policy must be kept in effect while you live, eliminating the risk that a new owner of the policy could decide to cash it in.
Example
Marcie is the divorced mother of two children in their 20s, who will be her beneficiaries. Neither is sensible with money. Marcie has an estate of $700,000, plus universal life insurance that will pay $500,000 at her death. She wants to be sure her estate will not be liable for estate taxes, and so desires to transfer ownership of her policy. However, there's no one Marcie trusts enough to give her policy to outright.
She decides to create a life insurance trust, however, with her sister as trustee. She transfers ownership of the life insurance policy to her sister as trustee. After Marcie's death, her sister will handle the money for the children under the terms of the trust document.
If you want estate tax savings from the life insurance trust, you must comply with the following strict requirements:
* The life insurance trust must be irrevocable. If you have the right to revoke it, you will be considered the owner of the policy, and the proceeds will be subject to estate taxes.
* You cannot be the trustee.
* You must establish the trust at least three years before your death. If the trust has not existed for at least three years when you die, the trust is disregarded for estate tax purposes, and the policy proceeds are included in your taxable estate.
http://www.ofseyerlaw.com/lawyer-attorney-1FA0B427-B3A6-4957-94720E9FAE7B273F.html
Friday, June 15, 2007
Using Life Insurance to Provide for Your Kids
Life insurance may be a good source of income for your children if you die. Here's what you should know.
At some time or other, all parents worry about what will happen to their children if one or both parents were to die prematurely. Often, life insurance is the first place parents turn when these worries arise. Although life insurance may be a good source of income for your children if you die, before buying a policy you should carefully consider whether or not you really need it, what type of policy is best and who should manage the proceeds on behalf of your children.
What Type of Life Insurance Do You Need, If Any?
Before buying a policy, consider all sources of income for your children if you were to die while they still needed financial support. Those sources might include:
- the property you leave behind
- Social Security survivor's benefits, and
- grandparents or other family members.
If you are wealthy or have affluent relatives who would step forward if necessary, you need little or no life insurance. And if, like most folks, you're struggling to pay for your car's brake job or your kid's braces, you can't afford to (and shouldn't) divert much of your current income to cope with the fairly remote possibility that you may die prematurely.
With this in mind, you should avoid expensive cash value life insurance ( whole life, universal life, variable life) policies that offer a lump sum after a certain period of time (20 or 30 years, for example) or after you reach a certain age (often 65). This lump sum payment is sold as a long-term savings/investment feature; it does nothing to affect how much money will be available to your child if you die in the next few years.
If you're reasonably young and reasonably healthy, consider purchasing a moderate amount of term insurance, which is the cheapest form of life insurance. Younger parents can obtain a significant amount of coverage for relatively low cost, for the obvious reason that statistically they are unlikely to die soon, so the risk to the insurance company is low. It will provide quick cash for your children if necessary, without draining your bank account now.
Leaving Life Insurance Benefits to Minor Children
If you decide to purchase life insurance for the benefit of your children, you need to arrange some legal means for the proceeds to be managed and supervised by a competent adult. If you don't, and your children are not legal adults when you die, the court will appoint a property guardian for the children. There are several ways to prevent this:
- Rethink your plan to name minors as beneficiaries of your life insurance policy. Instead, name a trusted adult beneficiary who will use the money for the children's benefit. If you are confident that this adult will not waver from his or her duty, even years down the line, this might be the easiest option.
- Name your children as policy beneficiaries and name an adult custodian under your state's Uniform Transfers to Minors Act. Most insurance companies permit this and have forms for it. If you want the proceeds to go to more than one child, you'll need to specify the percentage each one receives.
- If you have a living trust, name the trustee as the beneficiary of the policy. In the trust document, name the minor children as beneficiaries of any money the trust receives from the insurance policy. Also establish within the trust a method to impose adult management over the proceeds, which can be either achild's trust or a Uniform Transfers to Minors Act (UTMA) custodianship. You'll need to give a copy of your living trust to the insurance company.
Using the UTMA vs. Creating a Child's Trust
There are a few important differences between leaving life insurance benefits to your children under the UTMA and through a child's trust:
- Age when proceeds are released. In most states, an UTMA custodian must turn the proceeds over to the child at an age specified by law -- 18 or 21 in most states, up to 25 in just a few. In contrast, with a child's trust, you can specify any age at which your child receives the proceeds.
- Reporting requirements. A trustee for a child's trust must file yearly income tax returns for the trust. An UTMA custodian need not file tax returns, although the minor must file a yearly return reporting money actually received.
- Tax rates. Trust income tax rates are higher than individual tax rates. Annual income above a certain amount in a child's trust is taxed at the higher trust tax rates. In contrast, all of the property subject to the UTMA is taxed at the child's individual tax rate.
- Ease of fulfilling property management duties. Because the UTMA is built into state law, financial institutions know about it and are comfortable with it. This should make it easy for the custodian to manage the insurance proceeds on behalf of the child.
Generally speaking, a UTMA custodianship is the most attractive option unless the amount of insurance is very large and the child will need a property manager past the age of 21. The UTMA is simpler to set up and manage -- and often cheaper (from a tax point of view) -- than a child's trust. A UTMA custodianship is particularly sensible for proceeds below $100,000. Amounts of this size often are expended fairly rapidly for the child's education and living needs, and are simply not large enough to tie up beyond the age of 21. If larger amounts are involved and you do not believe the child will be able to responsibly handle the money at the UTMA age limit, a child's trust is a good bet.
http://www.ofseyerlaw.com/lawyer-attorney-2901B854-B116-4C8D-A110CFB3F8158CAD.html
Life Insurance Options
When it comes to choosing a life insurance policy, you may feel dazed by your options. Here are the basic types and the pros and cons of each.
Term Insurance
Term insurance provides a preset amount of cash if you die while the policy is in force. For example, a five-year $130,000 term policy pays off if you die within five years -- and that's it. If you live beyond the end of the term, you get nothing (except, of course, the continued joys and sorrows of life itself). With term insurance, you pay only for life insurance coverage. The policy does not develop reserves.
Term insurance is the cheapest form of coverage over a limited number of years, especially when you're young. It is particularly suitable for younger parents who want substantial insurance coverage at low cost. Since the risk of dying in your 20s, 30s or 40s is quite low, the cost of term insurance during these years is as reasonable as life insurance prices get. Also, if you need insurance for only a short time, say to qualify for a business loan, term is your best bet. However, the older you are, the more expensive term insurance premiums become compared to the payoff value of the policy. This, of course, is understandable, as the older you are, the greater the chance you will die during the policy term.
Term policies offered by different companies have all sorts of differences, some fairly significant. For example, some policies are automatically renewable at the end of the term without a medical examination, often for higher premiums, and some are not. Some have premiums set for a period of years, but others guarantee a premium rate for only the first year. After that, the rate can go up. Some can also be converted from a term towhole life or "universal" policy during the term, again without needing to requalify.
But remember, with term insurance you never lock in the right to maintain the policy no matter how old you become. If you want to ensure that insurance will continue in force for your entire life, term isn't for you.
Permanent Insurance
Permanent insurance is much more expensive than term insurance. Why buy it? Because it can never be cancelled as long as you pay the premiums, and because it's also an investment.
With a permanent policy, your premium payments for the first few (or more than a few) years cover more than the insurance company's cost of your risk of death. The excess money goes into a reserve account, which is invested by the insurance company. Unless the company is disastrously managed, these investments yield returns in the form of interest or dividends. A proportion of these are passed along to you. You can add these returns to your policy reserves or borrow against them, after a set time. And if you decide to end the policy, you can cash it in for the "surrender value."
Returns that accumulate are not taxable, unless the money is actually distributed to you. Certain partial withdrawals can even be made without paying tax. By contrast, the interest on bank accounts is subject to tax in the year it is paid, even if left untouched in the account.
However, although permanent insurance policies do function as an investment, maximizing your investment return is not the purpose of insurance. If that's what you want, you'd probably do better to buy cheaper term insurance and put the money you save in other tax-deferred investments.
Here are more details on several types of permanent life insurance.
Whole Life Insurance
Whole life (sometimes called "straight life") insurance provides a set dollar amount of coverage which can never be cancelled, in exchange for fixed, uniform payments. Because the payments are the same throughout your life, in the early years of the policy, the premiums are high compared to your statistical risk of death. This is why reserves are built up. Assuming you live a long while after the policy was issued, your payments become low, compared to your risk of death. In other words, during the first few years of a whole life policy, insurance companies take in substantially more money than they pay out.
Some of the surplus goes to pay the insurance agent's commission. Some of it becomes your cash reserve, which the company puts in fixed-income investments. After a set time, usually several years, you have the right to borrow against the cash reserve. You can also, of course, cancel the policy and receive its cash surrender value.
Whole life is generally undesirable for younger people with small children who can't afford the high premiums during the early years of the policy.
Universal Life Insurance
Universal life combines some of the desirable features of both term and whole life insurance, and offers other advantages. Over time, the net cost usually is lower than whole life insurance. With universal life, you build up a cash reserve, as with whole life. But you can also vary the premium payments, amount of coverage, or both, from year to year. In contrast, whole life requires one set payment amount, which cannot be varied, for the life of the policy. Also, universal life policies normally provide you with more consumer information. For example, you are told how much of your premium goes towards company overhead expenses, reserves and policy proceed payments, and how much is retained for your savings. This information isn't usually provided with whole life policies.There can be other significant advantages to universal life; an insurance agent will be glad to explain them to you.
Variable Life Insurance
Variable life insurance refers to policies in which cash reserves are invested in securities, stocks and bonds. In a sense, these policies combine an insurance feature with a mutual fund. That means your investment return is tied to the financial markets' performance.
Variable Universal Life Insurance
Variable Universal Life Insurance is a type of whole life insurance that combines the premium payment and coverage flexibility of universal life insurance with the investment opportunity (and risk) of variable life insurance.
Single-Premium Life Insurance
With single-premium life, you pay, up-front, all premiums due for the full duration of the policy. Normally, any policy with a savings feature can be purchased with a single premium. Obviously, this requires a large chunk of cash -- $5,000, $10,000 or often much more, depending on your age and the dollar amount of the policy. One reason to commit so much cash to buying an insurance policy is that it enables you to give the fully-paid-for policy to new owners, which can result in major estate tax savings. Because there are no more payments to make, a gift of a single-premium policy doesn't involve risks that the new owners will fail to make payments and cause the policy to be canceled.
Survivorship Life Insurance
Survivorship life insurance (also called "second to die" or "joint" insurance) is a relatively new type of insurance. It provides a single policy that insures two lives, usually spouses. When the first spouse dies, no proceeds are paid. Instead, the policy remains in force and the surviving spouse must continue to pay premiums. The policy pays off only upon the death of the second spouse.
Why would any couple want such a policy? Mainly for use as part of an estate plan for wealthier couples who expect that substantial estate taxes will be assessed on the death of the second spouse.None of this is of interest to people with small or moderate-sized estates.
This type of insurance may also be desirable when a major family asset is a valuable family business, or real estate interests -- assets that aren't liquid, and which the survivors may not want to sell. Or suppose two children inherit a family business, but one doesn't want to keep it going. The other could use her share of the insurance proceeds as an initial buy-out payment, so she could retain ownership of the business.
Finally, this kind of insurance may be desirable if one member of a couple is in less than good health, making other types of insurance extremely expensive. Because two lives are insured, premiums for survivorship life policies are relatively low compared to policies on one person's life. Therefore, if the other spouse is in reasonably good health, the couple can usually obtain survivorship life insurance.
http://www.ofseyerlaw.com/lawyer-attorney-6339C048-63C4-4370-A0BD5A9A130DD1E4.html
Term Insurance
Term insurance provides a preset amount of cash if you die while the policy is in force. For example, a five-year $130,000 term policy pays off if you die within five years -- and that's it. If you live beyond the end of the term, you get nothing (except, of course, the continued joys and sorrows of life itself). With term insurance, you pay only for life insurance coverage. The policy does not develop reserves.
Term insurance is the cheapest form of coverage over a limited number of years, especially when you're young. It is particularly suitable for younger parents who want substantial insurance coverage at low cost. Since the risk of dying in your 20s, 30s or 40s is quite low, the cost of term insurance during these years is as reasonable as life insurance prices get. Also, if you need insurance for only a short time, say to qualify for a business loan, term is your best bet. However, the older you are, the more expensive term insurance premiums become compared to the payoff value of the policy. This, of course, is understandable, as the older you are, the greater the chance you will die during the policy term.
Term policies offered by different companies have all sorts of differences, some fairly significant. For example, some policies are automatically renewable at the end of the term without a medical examination, often for higher premiums, and some are not. Some have premiums set for a period of years, but others guarantee a premium rate for only the first year. After that, the rate can go up. Some can also be converted from a term towhole life or "universal" policy during the term, again without needing to requalify.
But remember, with term insurance you never lock in the right to maintain the policy no matter how old you become. If you want to ensure that insurance will continue in force for your entire life, term isn't for you.
Permanent Insurance
Permanent insurance is much more expensive than term insurance. Why buy it? Because it can never be cancelled as long as you pay the premiums, and because it's also an investment.
With a permanent policy, your premium payments for the first few (or more than a few) years cover more than the insurance company's cost of your risk of death. The excess money goes into a reserve account, which is invested by the insurance company. Unless the company is disastrously managed, these investments yield returns in the form of interest or dividends. A proportion of these are passed along to you. You can add these returns to your policy reserves or borrow against them, after a set time. And if you decide to end the policy, you can cash it in for the "surrender value."
Returns that accumulate are not taxable, unless the money is actually distributed to you. Certain partial withdrawals can even be made without paying tax. By contrast, the interest on bank accounts is subject to tax in the year it is paid, even if left untouched in the account.
However, although permanent insurance policies do function as an investment, maximizing your investment return is not the purpose of insurance. If that's what you want, you'd probably do better to buy cheaper term insurance and put the money you save in other tax-deferred investments.
Here are more details on several types of permanent life insurance.
Whole Life Insurance
Whole life (sometimes called "straight life") insurance provides a set dollar amount of coverage which can never be cancelled, in exchange for fixed, uniform payments. Because the payments are the same throughout your life, in the early years of the policy, the premiums are high compared to your statistical risk of death. This is why reserves are built up. Assuming you live a long while after the policy was issued, your payments become low, compared to your risk of death. In other words, during the first few years of a whole life policy, insurance companies take in substantially more money than they pay out.
Some of the surplus goes to pay the insurance agent's commission. Some of it becomes your cash reserve, which the company puts in fixed-income investments. After a set time, usually several years, you have the right to borrow against the cash reserve. You can also, of course, cancel the policy and receive its cash surrender value.
Whole life is generally undesirable for younger people with small children who can't afford the high premiums during the early years of the policy.
Universal Life Insurance
Universal life combines some of the desirable features of both term and whole life insurance, and offers other advantages. Over time, the net cost usually is lower than whole life insurance. With universal life, you build up a cash reserve, as with whole life. But you can also vary the premium payments, amount of coverage, or both, from year to year. In contrast, whole life requires one set payment amount, which cannot be varied, for the life of the policy. Also, universal life policies normally provide you with more consumer information. For example, you are told how much of your premium goes towards company overhead expenses, reserves and policy proceed payments, and how much is retained for your savings. This information isn't usually provided with whole life policies.There can be other significant advantages to universal life; an insurance agent will be glad to explain them to you.
Variable Life Insurance
Variable life insurance refers to policies in which cash reserves are invested in securities, stocks and bonds. In a sense, these policies combine an insurance feature with a mutual fund. That means your investment return is tied to the financial markets' performance.
Variable Universal Life Insurance
Variable Universal Life Insurance is a type of whole life insurance that combines the premium payment and coverage flexibility of universal life insurance with the investment opportunity (and risk) of variable life insurance.
Single-Premium Life Insurance
With single-premium life, you pay, up-front, all premiums due for the full duration of the policy. Normally, any policy with a savings feature can be purchased with a single premium. Obviously, this requires a large chunk of cash -- $5,000, $10,000 or often much more, depending on your age and the dollar amount of the policy. One reason to commit so much cash to buying an insurance policy is that it enables you to give the fully-paid-for policy to new owners, which can result in major estate tax savings. Because there are no more payments to make, a gift of a single-premium policy doesn't involve risks that the new owners will fail to make payments and cause the policy to be canceled.
Survivorship Life Insurance
Survivorship life insurance (also called "second to die" or "joint" insurance) is a relatively new type of insurance. It provides a single policy that insures two lives, usually spouses. When the first spouse dies, no proceeds are paid. Instead, the policy remains in force and the surviving spouse must continue to pay premiums. The policy pays off only upon the death of the second spouse.
Why would any couple want such a policy? Mainly for use as part of an estate plan for wealthier couples who expect that substantial estate taxes will be assessed on the death of the second spouse.None of this is of interest to people with small or moderate-sized estates.
This type of insurance may also be desirable when a major family asset is a valuable family business, or real estate interests -- assets that aren't liquid, and which the survivors may not want to sell. Or suppose two children inherit a family business, but one doesn't want to keep it going. The other could use her share of the insurance proceeds as an initial buy-out payment, so she could retain ownership of the business.
Finally, this kind of insurance may be desirable if one member of a couple is in less than good health, making other types of insurance extremely expensive. Because two lives are insured, premiums for survivorship life policies are relatively low compared to policies on one person's life. Therefore, if the other spouse is in reasonably good health, the couple can usually obtain survivorship life insurance.
http://www.ofseyerlaw.com/lawyer-attorney-6339C048-63C4-4370-A0BD5A9A130DD1E4.html
Do You Need Life Insurance?
Not everyone needs life insurance. Find out whether or not you do.
Life insurance has long been a part of estate planning in the United States. Although life insurance does not need to be a part of every person's estate plan, it can be very useful, especially for parents of young children and those who support a spouse or a disabled adult or child. In addition to helping to support dependents, life insurance can help solve several other common estate planning problems by:
* Providing immediate cash at death. Insurance proceeds are a handy source of cash to pay the deceased's debts, funeral expenses, and income or death taxes. (Federal estate taxes are due nine months after death, so cash to pay them doesn't have to be raised immediately.)
* Avoiding probate. The proceeds of a life insurance policy are not subject to probate unless you name your estate as the beneficiary of the policy. If anyone else, including a trust, is the beneficiary of the policy, the proceeds are not included in the probate estate, and can be quickly transferred to survivors with little red tape, cost or delay. Except when your estate will have no ready cash to pay anticipated debts and taxes, there is no sound reason for naming your estate, rather than a person, as the beneficiary of your life insurance policy.
* Reducing death taxes. When an insured person does not legally own his or her life insurance policy, the proceeds are excluded from the insured's taxable estate. This can significantly reduce death tax liability of the insured's estate. Obviously, though, this benefits only those whose estates are large enough to face death tax liability in the first place.
Most people who have no minor children or financially strapped dependents simply don't need life insurance. If you decide to purchase insurance, you should know exactly why you are buying it, and choose the best type of policy for your needs. And, of course, you should buy no more than you need.
Here are some questions to ask yourself to help evaluate your life insurance needs.
1. Long-Term Needs
To determine whether it makes sense for you to buy insurance to provide financial help for family members over the long term, consider these factors:
* How many people depend on your current earning capacity over the long term? If the answer is "none," you probably don't need life insurance.
* If you died suddenly, how much money would your dependents need, and for how long? From that amount, subtract the worth of property they would inherit from you and any amounts that will be available from public and any private insurance plans that already provide coverage. Social Security and dependents' benefits will probably be available, and you may also be covered by union or management pensions or a group life insurance plan. Also subtract any other likely sources of income, such as the help reasonably affluent grandparents would assuredly provide for your children in case of disaster. Also, remember that bright kids may get at least partial scholarships, and dependent spouses caring for young children can usually return to work at some point. Once you perform this exercise, you may find that your dependents will need little or no additional income from life insurance.
2. Short-Term Needs
Now, assess whether you need life insurance for short-term needs.
* After you die, how long is it likely to be before your property is turned over to your inheritors? If most of your property will avoid probate, there's usually little need for insurance for short-term expenses, unless you have no bank accounts, securities or other cash assets. By contrast, if the bulk of your property is transferred by will, and therefore will be tied up in probate for months, your family and other inheritors may need the ready cash insurance can provide. While a probate court will usually promptly authorize a family allowance or otherwise allow a spouse or other inheritor access to estate funds, it can still be nice to have insurance proceeds available.
* What other assets will be available to take care of immediate financial needs? Aside from buying insurance, there are other, cheaper ways of providing ready cash. For example, you might leave some money in joint or pay-on-death bank accounts, or place marketable stocks in joint tenancy or register them in beneficiary (transfer-on-death) form.
* Will your estate owe substantial debts and taxes after your death? Lawyers and financial advisors call cash and assets that can quickly be converted to cash "liquid." If your estate has almost all "non-liquid" assets (real estate, collectibles, a share in a small business, jewelry) there may be a significant financial loss if these assets must be sold quickly to raise cash to pay bills, as opposed to what they could be sold for later if there had been enough liquid money from insurance or other sources to meet all pressing bills. Obviously, if your estate has significant funds in bank accounts or marketable securities, you won't need insurance for this purpose.
Example
Alicia owns several valuable pieces of real estate and a half-interest in a profitable antique store, but she has very little cash and no life insurance. When she dies, she owes debts of $90,000 (aside from mortgages) and death taxes of $120,000.
To raise this money, her beneficiaries (technically, her executor) must sell some of her real estate or her interest in the store. Unfortunately, the country is suffering a recession, and the market value of both antiques and real estate is down. To make matters worse, canny real estate people spread the word that this is a "distress sale" to raise money for estate obligations. As a result, the price the beneficiaries receive when they sell one of the pieces of real estate is far below what they would have received had they been able to choose when to sell. Had Alicia purchased an insurance policy with a payoff at death of $210,000 or more, they wouldn't have been forced to sell in a hurry.
* If you are the sole owner of a business, how much cash will it need when you die? Do you want, and expect, that some of your inheritors will continue the business? If so, do you think there will be enough cash flow for them to successfully maintain the business? You may need insurance proceeds to cover any cash flow shortage of the business. If your inheritors won't continue the business, the questions are simpler: How much is your death likely to affect the value of the business? Will there be enough cash to keep the business alive until it is sold? Is there really anything to sell? For many personal service businesses, the answer is no -- the business ends when the person providing the service dies.
http://www.ofseyerlaw.com/lawyer-attorney-8B3B468D-B586-4653-BCA59430C001C6D6.html
Life insurance has long been a part of estate planning in the United States. Although life insurance does not need to be a part of every person's estate plan, it can be very useful, especially for parents of young children and those who support a spouse or a disabled adult or child. In addition to helping to support dependents, life insurance can help solve several other common estate planning problems by:
* Providing immediate cash at death. Insurance proceeds are a handy source of cash to pay the deceased's debts, funeral expenses, and income or death taxes. (Federal estate taxes are due nine months after death, so cash to pay them doesn't have to be raised immediately.)
* Avoiding probate. The proceeds of a life insurance policy are not subject to probate unless you name your estate as the beneficiary of the policy. If anyone else, including a trust, is the beneficiary of the policy, the proceeds are not included in the probate estate, and can be quickly transferred to survivors with little red tape, cost or delay. Except when your estate will have no ready cash to pay anticipated debts and taxes, there is no sound reason for naming your estate, rather than a person, as the beneficiary of your life insurance policy.
* Reducing death taxes. When an insured person does not legally own his or her life insurance policy, the proceeds are excluded from the insured's taxable estate. This can significantly reduce death tax liability of the insured's estate. Obviously, though, this benefits only those whose estates are large enough to face death tax liability in the first place.
Most people who have no minor children or financially strapped dependents simply don't need life insurance. If you decide to purchase insurance, you should know exactly why you are buying it, and choose the best type of policy for your needs. And, of course, you should buy no more than you need.
Here are some questions to ask yourself to help evaluate your life insurance needs.
1. Long-Term Needs
To determine whether it makes sense for you to buy insurance to provide financial help for family members over the long term, consider these factors:
* How many people depend on your current earning capacity over the long term? If the answer is "none," you probably don't need life insurance.
* If you died suddenly, how much money would your dependents need, and for how long? From that amount, subtract the worth of property they would inherit from you and any amounts that will be available from public and any private insurance plans that already provide coverage. Social Security and dependents' benefits will probably be available, and you may also be covered by union or management pensions or a group life insurance plan. Also subtract any other likely sources of income, such as the help reasonably affluent grandparents would assuredly provide for your children in case of disaster. Also, remember that bright kids may get at least partial scholarships, and dependent spouses caring for young children can usually return to work at some point. Once you perform this exercise, you may find that your dependents will need little or no additional income from life insurance.
2. Short-Term Needs
Now, assess whether you need life insurance for short-term needs.
* After you die, how long is it likely to be before your property is turned over to your inheritors? If most of your property will avoid probate, there's usually little need for insurance for short-term expenses, unless you have no bank accounts, securities or other cash assets. By contrast, if the bulk of your property is transferred by will, and therefore will be tied up in probate for months, your family and other inheritors may need the ready cash insurance can provide. While a probate court will usually promptly authorize a family allowance or otherwise allow a spouse or other inheritor access to estate funds, it can still be nice to have insurance proceeds available.
* What other assets will be available to take care of immediate financial needs? Aside from buying insurance, there are other, cheaper ways of providing ready cash. For example, you might leave some money in joint or pay-on-death bank accounts, or place marketable stocks in joint tenancy or register them in beneficiary (transfer-on-death) form.
* Will your estate owe substantial debts and taxes after your death? Lawyers and financial advisors call cash and assets that can quickly be converted to cash "liquid." If your estate has almost all "non-liquid" assets (real estate, collectibles, a share in a small business, jewelry) there may be a significant financial loss if these assets must be sold quickly to raise cash to pay bills, as opposed to what they could be sold for later if there had been enough liquid money from insurance or other sources to meet all pressing bills. Obviously, if your estate has significant funds in bank accounts or marketable securities, you won't need insurance for this purpose.
Example
Alicia owns several valuable pieces of real estate and a half-interest in a profitable antique store, but she has very little cash and no life insurance. When she dies, she owes debts of $90,000 (aside from mortgages) and death taxes of $120,000.
To raise this money, her beneficiaries (technically, her executor) must sell some of her real estate or her interest in the store. Unfortunately, the country is suffering a recession, and the market value of both antiques and real estate is down. To make matters worse, canny real estate people spread the word that this is a "distress sale" to raise money for estate obligations. As a result, the price the beneficiaries receive when they sell one of the pieces of real estate is far below what they would have received had they been able to choose when to sell. Had Alicia purchased an insurance policy with a payoff at death of $210,000 or more, they wouldn't have been forced to sell in a hurry.
* If you are the sole owner of a business, how much cash will it need when you die? Do you want, and expect, that some of your inheritors will continue the business? If so, do you think there will be enough cash flow for them to successfully maintain the business? You may need insurance proceeds to cover any cash flow shortage of the business. If your inheritors won't continue the business, the questions are simpler: How much is your death likely to affect the value of the business? Will there be enough cash to keep the business alive until it is sold? Is there really anything to sell? For many personal service businesses, the answer is no -- the business ends when the person providing the service dies.
http://www.ofseyerlaw.com/lawyer-attorney-8B3B468D-B586-4653-BCA59430C001C6D6.html
Creating and Maintaining Personnel Files
Here's information on what you should -- and shouldn't -- keep in an employee's personnel file and on how to make sure that file is up to date.
Few of us enjoy dealing with paperwork, but taking the time to properly create and maintain your personnel files will pay off in the long run. You will have all of the important documents relating to each employee in one place, easily available when it's time to make decisions on promotions or layoffs, to file tax returns, or to comply with government audits. And if you have to fire a problem employee, careful documentation will protect you from legal danger.
What to Keep in a Personnel File
You should begin a personnel file for each of your employees on the date of hire. All important job-related documents should go in the file, including:- job description for the position
- job application and/or resume
- offer of employment
- IRS Form W-4 (the Employee's Withholding Allowance Certificate)
- receipt or signed acknowledgment of employee handbook
- performance evaluations
- forms relating to employee benefits
- forms providing next of kin and emergency contacts
- complaints from customers and/or co-workers
- awards or citations for excellent performance
- records of attendance or completion of training programs
- warnings and/or other disciplinary actions
- notes on attendance or tardiness
- any contract, written agreement, receipt, or acknowledgment between the employee and the employer (such as a noncompete agreement, an employment contract, or an agreement relating to a company-provided car), and
- documents relating to the worker's departure from the company (such as reasons why the worker left or was fired, unemployment documents, insurance continuation forms, and so on).
What Not to Keep in a Personnel File
Do not put medical records into a personnel file. If your worker has a disability, you are legally required to keep all of the worker's medical records in a separate file -- and limit access to only a few people. Although this rule applies only to workers with disabilities, it is a good idea to segregate medical information for all workers -- just in case.
Do not put Form I-9 into an employee's personnel file. This is a form from an agency now known as USCIS (U.S.Citizenship and Immigration Services, formerly the INS). You must complete an I-9 for all employees, verifying that you have checked to be sure that the employees are legally authorized to work in the United States. You should put all Form I-9s into one folder for USCIS. The government is entitled to inspect these forms, and if it does, you don't want the agents viewing the rest of the employee's personnel -- and personal -- information at the same time. Not only would this compromise your workers' privacy, it might also open your business up to additional questions and investigation.
Although an employee's personnel file should contain every other important job-related document, don't go overboard. Remember that, in many states, employees have the right to view their personnel files. And, in the worst case scenario, that file may turn into evidence in a lawsuit brought by a disgruntled former employee. Indiscreet entries that do not directly relate to an employee's job performance and qualifications -- like references to an employee's private life or political beliefs; or unsubstantiated criticisms or comments about an employee's race, sex, or religion -- will come back to haunt you. A good rule of thumb: Don't put anything in a personnel file that you would not want a jury to see.
How to Maintain a Personnel File
You should establish a time to periodically review each employee's personnel file, perhaps when you conduct the employee's evaluation. During this review, consider whether the documents in the file are accurate, up to date and complete. Some questions to consider:- Does the file reflect all of the employee's raises, promotions, and commendations?
- Does the file contain every written evaluation of the employee?
- Does the file show every warning or other disciplinary action taken against the employee?
- If your policies provide that written warnings or other records of discipline will be removed from an employee's file after a certain period, have they been removed?
- If the employee was on a performance improvement plan, a probationary or training period, or other temporary status, has it ended? Has the file been updated to reflect the employee's current status?
- If the employee handbook has been updated since the employee started working for you, does the file contain a receipt or acknowledgment for the most recent version?
- Does the file contain current versions of every contract or other agreement between you and the employee?
http://www.szlawfirm.net/lawyer-attorney-ECDE151A-DC5D-42A6-B58219263F58318D.html
Email Policies
Find out why you need to adopt a policy on employee use of email -- and what you should put in your policy.
Do you make computers and email available to your employees? If so, you should seriously consider adopting a policy explaining your company's rules for using email -- and reserving your right to monitor the messages sent and received on their computers.
Why You Need an Email Policy
There are several very good reasons to adopt an email policy. First and foremost, you need to let your employees know that you may monitor their messages. Even if you have never read employee email and don't plan to make it your regular practice, you should protect your right to do so. If you don't, you might find yourself unable to investigate claims of harassment, discrimination, theft and other misconduct -- or threatened with a lawsuit by an employee who claims that your investigation violated his or her privacy.
Consider these statistics: In a 1999 survey commissioned by Elron Software, more than 60% of workers admitted to sending or receiving adult-oriented personal email at work; more than 55% admitted to sending or receiving personal email messages that are racist, sexist or otherwise offensive; one in ten employees admitted receiving confidential information about another company in personal email, and a significant number admitted sending messages that included confidential information about their own companies.
If you are ever faced with an employee who uses email to transmit pornographic images, reveal trade secrets or send racist or sexist messages -- and these statistics demonstrate that you may very well find yourself in this position -- you will have to read the messages to figure out what to do. If you don't have a policy warning employees that you can read their messages at any time, an employee might sue you for violation of privacy.
In addition, some states -- including Connecticut and Delaware -- require employers who monitor email messages to let their employees know. Every year, more states consider imposing similar requirements. Putting this information in a workplace policy helps you meet these legal obligations.
Finally, you can use an email policy to tell your employees how you expect them to use the email system -- and what uses are prohibited. Laying down the rules clearly, in writing, will go a long way towards preventing abuses in the first place.
What to Include in Your Email Policy
Your email policy should address these issues:
- Personal use of the email system. Explain whether employees can use email for personal messages. If you place any restrictions on personal messages (for example, that employees can send them only during non-work hours, must exercise discretion as to the number and type of messages sent or may not send personal messages with large attachments), describe those rules.
- Monitoring. Reserve your right to monitor employee email messages at any time. Explain that any messages employees send using company equipment are not private, even if the employee considers them to be personal. If you will monitor regularly using a particular system -- for example, a system that flags key words or copies every draft of a message -- explain it briefly. This will help deter employees from sending offensive messages in the first place.
- Rules. Make clear that all of your workplace policies and rules -- such as rules against harassment, discrimination, violence, solicitation and theft of trade secrets -- apply to employee use of the email system. Remind employees that all email messages sent on company equipment should be professional and appropriate. Some employers also include so-called netiquette rules -- style guidelines for email writing.
- Deleting email. Establish a regular schedule for purging email messages. If you don't, you will eventually run into a storage problem. Let your employees know how they can save important messages from the purge.
http://www.szlawfirm.net/lawyer-attorney-5C51E479-1917-48C4-987727C99757DF54.html
Employee Handbooks
An employee handbook can be a valuable tool in communicating your policies to your workforce. But don't make any promises you don't intend to keep.
If you have more than a few employees, consider creating an employee handbook that clearly explains your employment policies. The benefits of having an employee handbook are many. Every employee receives the same information about the rules of the workplace; your employees will know what you expect from them (and what they can expect from you) and you’ll get legal protection if an employee later challenges you in court.
What Goes in an Employee Handbook
Here are topics to consider including in an employee handbook.
Introduction. Begin the handbook by describing your company's history and business philosophy.
Hours. State the normal working hours for full-time employees, rules for part-time employees and how overtime compensation can be authorized for those entitled to it.
Pay and salaries. Be clear on how you set pay and salaries and how you raise them. Also explain any bonus programs.
Benefits. Explain the rules relating to benefits, including vacation pay, sick pay, unpaid leave, health benefits, other insurance benefits and retirement benefits.
Drug and alcohol abuse. Most businesses have a policy prohibiting employees from using drugs or alcohol in the workplace. Some also offer to help employees deal with substance abuse through counseling or employee assistance programs. Include this information in your handbook
Sexual harassment. Use your handbook to remind employees that sexual harassment is illegal and violates your policies. Let them know that you will not tolerate unwelcome sexual comments or conduct and that you will treat any complaints of harassment seriously. Specify how and to whom an employee can complain of sexual harassment, what procedures you will follow to investigate complaints and what actions will be taken against harassers.
Attendance. Emphasize the importance of good attendance and showing up on time. Explain that numerous unexplained absences or repeated tardiness can be a basis for disciplinary action or even firing.
Discipline. List the kinds of conduct that can get employees in trouble -- for example, theft, violence, repeated performance problems or fighting. Be sure to let your employees know that this is not an exclusive list and that you always reserve the right to decide to terminate a worker's employment.
Employee safety. State that employee safety is a major concern of your business and that employees are expected to follow safety rules and report any potentially dangerous conditions.
Smoking. Most businesses need a written policy for on-the-job smoking. Because many cities and some states now prohibit or restrict workplace smoking, you will have to check local ordinances to be sure your policy is legal.
Complaints. Let employees know what procedures they should follow to make and resolve complaints. Designate several people in the company to receive employee complaints, and state that there will be no retaliation against any employee for filing a complaint. Having -- and enforcing -- a written complaint procedure can help shield your business from liability if an employee later sues for illegal harassment or discrimination.
Workplace civility. State that employees at all levels of the company are expected to treat each other with respect and that the success of the business depends on cooperation and teamwork among all employees.
Conduct not covered by the handbook. You cannot write an employee handbook that will cover every possible workplace situation. It's best to make this clear to your employees by saying so in the handbook. Otherwise, your employees may argue that any action you take outside of what's explicitly set forth in the handbook is unfair.
Don't Create Obligations That Will Haunt You Later
Some courts -- and employees -- interpret the language in employee handbooks to create binding obligations on employers. You should avoid any unconditional promises in your employee handbook unless you are willing to face lawsuits by former employees trying to enforce those promises later. Here are some of the most common trouble spots:
Promises of continued employment. Unless you want to create an employment contract that obligates your employee to work for you for a period of time (and limits your right to fire the employee for the same period), don't put language in your handbook that promises employees a job as long as they follow your rules. A court might interpret this as a contract of employment that promises employees will not be fired absent good cause. To avoid this result, state in your employee handbook that your company reserves the right to terminate employees for reasons not stated in the handbook or for no reason at all. Even though you may never have to rely on this language, at least your employees will know where they stand.
Progressive discipline. Most employers follow some form of progressive discipline for performance problems or misconduct (attendance problems, difficulties getting along with co-workers or missing deadlines, for example). You may choose to start with a verbal warning, followed by a written warning for a second offense, followed by a probationary period or suspension, then termination for subsequent problems. Whatever system you implement, make sure to keep your options open. Don't obligate yourself to follow a particular disciplinary pattern for every employee in every circumstance; otherwise, you may find it difficult to fire an employee for truly egregious behavior.
http://www.szlawfirm.net/lawyer-attorney-E571350E-810F-4256-B65286835C3CFD28.html
Illegal Reasons for Firing Employees
There are certain reasons that you can never use to fire an employee.
Both state and federal law forbid you from using certain reasons to fire an employee. These prohibitions apply regardless of whether the employee has a contract for employment with you or not.
Discrimination
Federal law makes it illegal for most employers to fire an employee because of the employee's race, gender, national origin, disability, religion or age (if the person is older than 40). Federal law also prohibits most employers from firing someone because that person is pregnant or because that person has recently given birth or because of any related medical conditions.Most states also have anti-discrimination laws that include all of the characteristics listed in the federal law. Many state laws, however, are broader than federal law. They include additional prohibitions (for example, prohibiting discrimination on the basis of sexual orientation or marital status) and they include a wider range of employers.
Retaliation
It is illegal for employers to fire employees for asserting their rights under the state and federal anti-discrimination laws described above.Refusal to Submit to a Lie Detector Test
The federal Employee Polygraph Protection Act prohibits most employers from terminating employees for refusing to take a lie detector test. Many state laws also set out strong prohibitions against using lie detector tests.Alien Status
The federal Immigration Reform and Control Act (IRCA) prohibits most employers from using an employee's alien status as a reason for terminating that employee so long as that employee is legally eligible to work in the United States.Complaining about OSHA Violations
The federal Occupational Safety and Health Act (OSHA) makes it illegal for employers to fire employees for complaining that work conditions fall short of complying with state or federal health and safety rules.Violations of Public Policy
Most states prohibit employers from firing an employee in violation of public policy -- that is, for reasons that most people would find morally or ethically wrong. Of course, morals and ethics can be relative things, so the law will vary from state to state. Some states may prohibit reasons that other states do not. In addition, the reason must be pretty bad to violate public policy. A reason that strikes most people as merely mean or unfair usually won't do it.Despite this relativity, most states agree that the following would violate public policy and would therefore be illegal:
- terminating an employee for refusing to commit an illegal act (such as refusing to falsify insurance claims)
- terminating an employee for complaining about your illegal conduct (such as your failure to pay minimum wage), and
- terminating an employee for exercising a legal right (such as voting or other political activity).
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