Wednesday, June 15, 2022

Can Creditors Go After Life Insurance

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Benefits Of Owning Life Insurance In A Trust For Estate Planning Purposes

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For most people wanting to leave a legacy, the two assets that come top-of-mind are life insurance and a home.

Although nobody wants to think about death, life insurance provides a lot of benefits when it comes to setting up your estate plan. Having life insurance in a trust provides a multitude of benefits which I will briefly outline below:

Florida Bankruptcy Exemptions From Creditors

An essential concept in Chapter 7 bankruptcy is exemptions or exempt property. Bankruptcy exemptions describe the personal and real property a bankruptcy debtor may keep through the bankruptcy process and retain after the bankruptcy. As soon as a debtor files Chapter 7 bankruptcy in Florida, a Chapter 7 trustee takes control of the debtors non-exempt property for the benefit of the debtors unsecured creditors. The bankruptcy debtor may retain his exempt property regardless of its value and amount. What property is exempt and what property is non-exempt depends on the exemption laws of the applicable state.

The most common Florida bankruptcy exemptions include:

  • Homestead. Homestead is the debtors primary residence situated on up to 1/2 acre in a city and 160 contiguous acres in an unincorporated county.
  • Personal property exemptions. Debtors who claim a homestead exemption are permitted to also exempt $1,000 of miscellaneous personal property, such as household furniture. Non-homestead debtors may exempt $4,000 of personal property.
  • Motor vehicles. Cars are exempt up to $1,000 equity.
  • Wages. The wages and earnings of a bankruptcy debtor who is head of household are exempt.
  • Retirement accounts. The bankruptcy debtors IRA, 401k, pension, and similar retirement accounts are exempt under section 222.21 of Florida law.

Can The Irs Go After An Insurance Policy With A Beneficiary After

Life insurance policies are meant to help your loved ones if tragedy strikes. What you may not realize is that life insurance can also help your creditors. If you’re being sued for debts or if you file bankruptcy, your creditors might try to get hold of your life insurance holdings. If you’re concerned, you should find out if your life insurance policy is protected from creditors and if any of these protections have limitations.

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What Happens To Debt When You Die

04 June 2021

Thinking about and dealing with the debts of a deceased person is not a cheery thought. But its an important subject and because its rarely talked about, can be easily misunderstood and lead to confusion about what happens to debt when you die, and who is ultimately responsible for it. So do credit card debts die with you? And what happens to joint debts? In this article well answer all that and more.

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Transfer From A Joint To Individual Bank Account

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If you had a joint bank account with your partner, you can continue to still use it as normal.

You just need to tell the bank or building society that your partner has died, so that they can amend the account details.

But you might want to consider changing it at some point into an individual account in your name.

This should make it easier to manage your money and see whether you have enough every month to pay the bills.

You can notify most major banks and building societies, even if you didnt know about the account, using the free online Death Notification Service

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Can Creditors Go After Life Insurance Policies In A Revocable Trust

My friends ex husband had life insurance policies in his revocable trust that is under California law. He went to a hospital for a long time in Nevada without insurance and died. The policies his trust still hold are whole term policies for his Mother who is alive and well. My friend is a beneficiary of that trust and wonders if creditors might seize the policies to satisfy the debt because the eventual payout of those policies when her former mother in law passes is considerable.

  • view profileRobert TaylorIf the trust is revocable, then the creditors’ ability to go after the life insurance policy is the same as if the policy was simply held in the person’s name . Revocable trusts typically don’t insulate the owner from much of anything they are typically done for the sole purpose of passing assets on to the next person, and as such, whatever advantages exist because of the trust don’t really become advantages until after you die. If a trust is irrevocable , then extra protections exist while you are still living.Answered on April 17, 2016
  • What Happens To Car Loan Debt

    Your family will have a few options to handle any debt you owed on a vehicle:

    They could let the lender repossess the car if they dont want it.

    They could sell the car to pay off the loan.

    Or they could keep the car by continuing to pay what is owed on the loan.

    However, they likely will need to qualify as a borrower to maintain the terms of the loan or apply for an entirely new loan, says Bruce McClary, senior vice president of communications for the National Foundation for Credit Counseling.

    Of course, if there is a co-borrower on your car loan, that person will be responsible for the loan. Thats another debt you should factor into your calculations when figuring out how much life insurance to buy.

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    Can Both Spouses Claim Head Of Household Exemption

    When two spouses are named as debtors in the same judgment, only one of the spouses can be head-of-household. The joint debtors cannot argue that they each support a separate child or parent.

    Whenever two spouses each earn money, it is possible that neither of them can be head of household. If the spouses have children, the higher-earning spouse is probably head of household. But, if the two earning spouses do not have children, neither will qualify to claim the head of household exemption from wage garnishment. In that case, it is not enough that the debtor spouse earns more than the non-debtor spouse.

    The debtor claiming the exemption must be the dependent spouses primary source of support when looking at the dependents income from all sources. Courts will also consider non-financial factors, including which spouse oversees financial decisions.

    Federal Student Loans Are Forgiven

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    This forgiveness applies both to federal loans taken out by parents on behalf of their children and loans taken out by the students themselves. If the borrower dies, then the federal student loans are forgiven. The same if the student passes, the loan is discharged. Proof of death is required, which may be an original or a certified copy of the death certificate.

    For private student loans, on the other hand, there is no law requiring lenders to cancel a loan. Some loan programs offer loan forgiveness at death while others will charge the debt to the estate of deceased. It is best to check with the loan servicer.

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    What Happens To Student Loan Debt

    Youre in luck if you have federal student loans because they will be discharged if you die. That means they wont have to be paid. Any PLUS loan your parents took out to pay for your college education also will be discharged if you die. A family member will need to provide your loan servicer with a death certificate to prove your death and have the loans discharged.

    Youre not so lucky if you have private student loans.Theres no official discharge of private student loans, unlike federal student loans where the debt dies with the debtor or student borrower, Tayne says. If the loans are in your name only, assets from the estate can be used to pay what is owed if the lender doesnt discharge the debt.

    If you have a co-signer for a student loan, that person will be responsible for what is owed. In fact, some lenders include clauses in their contracts that require the balance to be paid immediately if a co-borrower dies, Tayne says.

    Of course, a life insurance payout could be used to pay off what is owed. However, the co-signer might be able to negotiate with the lender to amend the contract after the other co-signers death. It could help to work with a debt relief attorney who has experience negotiating with lenders in this situation.

    Cash Value Of Life Insurance

    There are many different types of life insurance policies. Cash value policies, such as whole-life insurance, deposit your premium into a cash account after subtracting insurance costs and other expenses, often including an annual charge. These policies usually have minimum dividends of two to four percent. You can withdraw cash at any time, but you might be taxed on the withdrawal. One downside to these policies is that some people can’t pay the yearly premium and end up having to cancel the policy. When you die, your family receives only the value of the policy, not the amount of cash you put into it. In contrast, term life insurance policies last for a limited period of time, such as 20 years, but the monthly premiums are much cheaper.

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    Use Of Revocable Trust To Hold Life Insurance

    With the passage of the Act in 2017, the estate tax exemption amount was increased to 11 million dollars, indexed for inflation for individuals. This amount will sunset in 2025, meaning it will revert back to 5 million index for inflation in 2025 unless the law is changed or the current law is made permanent.

    Seeing that the estate tax exemption is so high, and even if reduced to the previous amount, the majority of individuals fall well below the threshold. Here is where the Revocable Trust comes into play.

    The revocable trust can be used to own the life insurance or be the beneficiary of the life insurance. The benefit of the revocable trust holding the life insurance is that if you were to become incapacitated, your successor trustee will be able to keep administering the life insurance policy on your behalf.

    In any event, you will want the revocable trust to be the beneficiary of the life insurance so that the death benefit proceeds are distributed to your successor trustee for the funds to be administered according to your trust.

    A revocable trust gives you a lot of flexibility and control over an irrevocable trust. You can amend the trust at any time or even revoke it. Unlike an irrevocable trust, you can file the taxes for the assets in a trust under your own social security number, you will not need a separate taxpayer ID.

    Set Up An Irrevocable Trust

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    A trust is a legal entity that your attorney and you will create. Youll authorize somebody to manage your property and your assets in the trust.

    In this case, it would be an irrevocable asset protection trust. Just to warn you, these are expensive. Rates to set them up appear to be anywhere from $3,000 to $10,000 in attorney fees. And expect to pay annual asset management fees of approximately one percent.

    But its presumably a drop in the bucket compared to not protecting your assets. Its better than someday having your family be on the receiving end of a lawsuit and losing everything youve worked for. Or drain them of hundreds of thousands of dollars in legal fees.

    Typically, it comes down to this. Oddly enough, the more invulnerable you feel because you have a lot of assets, the more vulnerable you are to a lawsuit. And the more vulnerable you feel, because you have debt collectors calling, or youre living paycheck to paycheck, the less likely you and especially your beneficiaries are to be sued.

    You certainly could be, of course. But if youre pulling a $37,000 yearly income and your house is underwater, creditors probably arent going to pay much attention to you. And hopefully, your state would protect the life insurance payout if your family is targeted.

    But, fair or not, if your income statement makes a creditor think of the guy with the monocle on the Monopoly box, watch out.

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    Can You Use Your Life Insurance Policy To Pay Off Debts

    Life insurance is meant to be utilized as an income replacement for your dependents after you die. But, there are some policy options you can use to pay off loans while youâre alive. The tradeoff is that they can put your beneficiaries at a disadvantage.

    • Cash surrender: The cash value is an investment-like account included in most permanent life insurance policies. You can cash out your policy to access the cash value, but youâll lose life insurance protection and may pay taxes or penalties.

    • Collateral assignment: Some lenders give you the option to use your life insurance as collateral for a loan. If you die before repaying, the creditor recoups its money from the death benefit and the remainder is split among your beneficiaries.

    • Credit life insurance: A type of often tied to mortgages, credit life covers a specific loan and only benefits your creditor. Youâll need additional coverage to provide for your family.

    • Policy loan: Some insurers also allow you to take out a loan using your permanent policy as collateral. If you donât repay your loan, itâs subtracted from the death benefit when you die.

    • Viatical settlement: Though itâs not recommended, older policy owners can sell their life insurance policy for cash. In addition to losing coverage, youâll get a fraction of the death benefit in return and the transaction is subject to taxes and fees.

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    Retirement Accounts Are Creditor Protected In Florida

    Investing in retirement plans is not only a great idea for tax and financial planning, but they are also great tools for protecting your assets from creditors. Federal and Florida laws protect retirement monies that are held in traditional retirement accounts , 403, etc.) from creditor claims.

    Example: George owns a solo CPA firm. He invests every year in both his traditional and Roth IRA accounts for the tax benefits. George is later sued by a client due to an error that George made while preparing the clients tax return.

    Result: All of the monies held in Georges Roth and traditional IRAs will be completely protected from the creditor claim.

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    Your Policys Living Beneficiaries

    If you die with unpaid debts, your creditors are barred from trying to collect on this payout. This can be crucial if you are in significant debt and dont believe the value of your estate will cover all of your debts. By naming a loved one as the beneficiary of your life insurance policy, you can assure that your death may not mean they themselves will be saddled with debt trying to make ends meet in your absence.

    Preventing Debt After Death

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    Nearly three-quarters of Americans are in debt when they die, according to a 2017 study, and they owe an average of $61,554. There are ways to help keep that debt from being a burden to your heirs. One of those is to avoid the probate court.

    The best way to do that is to have a living trust because assets held in a trust are not subject to probate but are distributed according to the instructions in the trust. That saves beneficiaries time and money spent in probate.

    Other tips:

    Make sure you have a will that clearly says where assets will go. Make sure the beneficiaries are up to date things may have changed since the will was written.

    Speaking of beneficiaries, if there is a box on your IRA beneficiary list that says per stirpes, check it. This legal term means that should the intended beneficiary die before the person who made out the will, the beneficiarys share of the inheritance goes to his heirs.

    Since life insurance payments go beneficiaries rather than the estate, they will be taken care of should your estate be eaten up by creditors. Putting more money in IRAs and a 401k accomplishes the same thing.

    Keeping organized records is important. Family members should be able to quickly access your credit card accounts and look up balances.

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    Avoid Guardianship For Minors

    If a minor in Florida receives over $15,000 then a guardianship will have to be established for the benefit of the minor. Guardianship can be expensive and court intrusive.

    If the life insurance trust is used, when you pass away the trust will be beneficiary and the proceeds can be administered for the benefit of the minor without any court intervention.

    Passing The Mortgage On To Your Heirs

    The word mortgage comes from the French mort for death and +gage pledge, as in payable to death. But it really should mean payable after death as well. If you leave a mortgage behind for your kids, under federal law, lenders must allow family members to take over a mortgage when they inherit residential property. This law prevents heirs from having to qualify for the mortgage. Heirs are not required to keep the mortgage, meaning they can refinance or pay off the debt entirely. For married couples who are joint borrowers on a mortgage, the surviving spouse can take over the loan, refinance, or pay it off.

    If you inherit a property with a mortgage and cant afford the payments, there are options, but theyl depend on the situation. For instance, was there a reverse mortgage? That may need to be paid off as well. Is the property underwater? If the mortgage owed is greater than the property value, that may pose problems. Did you inherit the property and mortgage with siblings? The house may be more valuable to one sibling than another. If thats the case, then you may want to discuss equalizing the estate one sibling inherits the house while the other keeps some other asset like the life insurance proceeds. Its best to consult with the mortgage company, estate lawyer and other family members about possible workarounds. Mortgage payments will need to be paid, so its best not to procrastinate.

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