Make sure your policies are up to date

Dear Len & Rosie,

My husband recently passed away. I filled out the form on the insurance company’s website to report a claim. My husband never updated his beneficiary form to my name - the beneficiary is one of his sisters. My fault because I never asked him if he updated, and he had cancer - I should have thought to ask him but didn’t. If the sister is willing to gift me more than the yearly gift amount - is that possible without tax consequences for both of us? I’m probably I am just out of luck.

Linda

Dear Linda,

One of the things we emphasize with our clients is that they need to update and verify all of their beneficiary designations on retirement accounts, insurance policies, annuities, and pay-on-death accounts. These assets normally do not get transferred into trusts as they already avoid probate. This means that a will or trust does not change an insurance policy’s designated beneficiaries. The only way your husband could have done this was through the insurance company’s own change of beneficiary form.

Clearly, your husband purchased this policy well before he met you and he named his favorite sister (maybe his only sister) as beneficiary. The policy could even have been a low value policy provided by your husband’s employer or union at no cost to himself. It’s easy for a modest insurance policy to become an afterthought.

In any event, you’re more or less stuck with your sister-in-law receiving the money unless you can show that he used community property to pay the policy premiums which could result in you getting half of it at most.

Assuming you made an effort to be on good terms with your husband’s family, his sister may be willing to give some or all of the money to you. The good news is that there shouldn’t be any tax problems resulting from this. The proceeds of the life insurance policy are tax-free, except for the modest interest applied to the policy between your husband’s death and the date the insurance company issues the check.

There are not likely to be any gift tax issues either, as the amount your sister-in-law may pass to others by gift or inheritance is $11,580,000 for 2020. If she’s so lucky enough to be worth that much, then maybe she should stick to giving you $15,000 a year ($30,000 a year if she’s married), assuming that she’s generous enough to do so.

For our other readers: Don’t rely on your recollection as to whom you have left your life insurance, annuities and retirement accounts. Verification is less costly than making a terrible mistake.

Len & Rosie

Rumor has it that in case of my death, my wife will not be entitled to inherit my assets because of her German citizenship.

Dear Len & Rosie,

We have a family trust with myself and my wife as trustees. We have lived in California since 1958, having immigrated from Germany. I am a naturalized U.S. citizen but my wife is still German. Rumor has it that in case of my death, my wife will not be entitled to inherit my assets because of her German citizenship. Can you tell me the truth?

Karl

Dear Karl,

Some countries restrict the ownership of property to citizens, but in the United States, anyone can own anything regardless of his or her citizenship or  immigration status. Even if your wife were in this country illegally, she would still inherit everything you choose to leave her upon your death. But there may be some complications, depending on how wealthy you are.

If you were to die this year, the first $11,568,000 of everything you own upon your death shall pass free of federal estate tax. If you are so lucky to be worth more than that, it wouldn’t usually be a problem, because there is a unlimited gift and estate tax marital deduction. Everything you leave to your wife will not be subject to any estate tax. The potentially bad news for you is that this applies only if the surviving spouse is a United States citizen.

Non-citizen spouses do not get to take advantage of the estate tax marital deduction, because the theory is that the non-citizen surviving spouse would take everything back to the old homeland, which means the estate tax would never be paid. The IRS doesn’t like it when tax isn’t paid, so the law penalizes non-citizen spouses, but keep in mind that this applies only for wealthy couples.

If this is a problem for you, there are two solutions. First, your wife, who must be a permanent resident by now, could go through the naturalization process and become a United States citizen. If she’s not willing or able to do this, then you can take this into account in your estate plan. You can create a revocable trust, or amend an existing trust to include a specialized trust called a Q-DOT, or “Qualified Domestic Trust.”

With a Q-DOT, the portion of your assets that would otherwise be subject to federal estate tax would be held separately, in a trust that pays the estate tax in increments as distributions are made from it to your wife.

For those of you who created your trusts years ago when the amount that could pass free of estate tax was as low as $600,000, then you should review your trust and probably bring it up to date as many trusts with Q-DOT’s no longer need them.

Len & Rosie