Safe keeping: advance planning can protect the cash surrender values of life insurance policies when personal bankruptcy occurs.Depending on the state of residence, bankcruptcy exemption laws may protect all, some or none of the cash surrender values The amount of money that an insurance company pays the insured upon cancellation of a life insurance policy before death and which is a specific figure assigned to the policy at that particular time, reduced by a charge for administrative expenses. of life insurance policies. To protect the greatest amount possible, policyowners and agents need to know the state statutes and follow them in setting up the policy. For example, in time states that do protect cash surrender values, the ownership and beneficiary beneficiary Person or entity (e.g., a charity or estate) that receives a benefit from something (e.g., a trust, life-insurance policy, or contract). A primary beneficiary receives proceeds from a trust or insurance policy before any other. statutory prerequisites required to preserve exempt status differ. The timing of life insurance premium payments before filing bankruptcy bankruptcy, in law, settlement of the liabilities of a person or organization wholly or partially unable to meet financial obligations. The purposes are to distribute, through a court-appointed receiver, the bankrupt's assets equitably among creditors and, in most plays a varying role in allowing cash surrender values as a bankruptcy exemption. Twenty-five states allow life insurance cash surrender values to be 100% exempt from creditor An individual to whom an obligation is owed because he or she has given something of value in exchange. One who may legally demand and receive money, either through the fulfillment of a contract or due to injury sustained as a result of another's Negligence claims in bankruptcy should the policyowner meet statute requirements. "Playing by the Rules" on page 94 includes "State Laws for Exempt Life Insurance Cash Surrender Values," a list of the requirements of each state. The primary focus when purchasing life insurance is the insurance needs of the client. After those needs are determined, it is critical for the financial security of the client to set up the policy to take full advantage of exemption laws. Life insurance cash surrender values are significant assets that the policyowner can shelter from creditor claims under both state and federal bankruptcy exemption laws. Life insurance provides the peace of mind that loved ones loved ones npl → seres mpl queridos loved ones npl → proches mpl et amis chers loved ones love npl will be taken care of upon the insured's death. In many states, exemptions for the cash surrender values provide the added security that life insurance will survive the financial hardships of the policyowner. Creditors also can benefit from knowing the requirements for properly setting up those values as exempt assets in bankruptcy. The creditor can then determine whether they are attachable at·tach v. at·tached, at·tach·ing, at·tach·es v.tr. 1. To fasten, secure, or join: attached the wires to the post. 2. assets lot satisfying creditor claims. Policy Ownership Requirements For state cash surrender values exemption statutes to apply, 10 states require that the insured also be the owner of the policy. Thirteen other states require that if the insured is not the policyowner, a dependent must be the owner of the policy for the cash surrender value to be exempt. (See "State Laws," column 2.) For example, a Florida Florida, state, United States Florida (flôr`ĭdə, flŏr`–), state in the extreme SE United States. A long, low peninsula between the Atlantic Ocean (E) and the Gulf of Mexico (W), Florida is bordered by Georgia and court considered the case in which a debtor One who owes a debt or the performance of an obligation to another, who is called the creditor; one who may be compelled to pay a claim or demand; anyone liable on a claim, whether due or to become due. husband was the insured and the debtor's wife was the owner of life insurance policies. The court held that the Florida statute only exempts policies if the debtor was both the owner and the insured. The court found that if a policy's owner and insured were not identical, then the cash surrender value of the policy was not exempt. The court granted the bankruptcy trustee and creditor's motion for summary judgment motion for summary judgment n. a written request for a judgment in the moving party's favor before a lawsuit goes to trial and based on recorded (testimony outside court) affidavits (or declarations under penalty of perjury), depositions, admissions of fact, answers and awarded them the cash surrender values of two policies. Requiring the insured also to own the policy may present estate tax planning Tax planning Devising strategies throughout the year in order to minimize tax liability, for example, by choosing a tax filing status that is most beneficial to the taxpayer. problems for large estates. Any incidents of ownership require all insurance proceeds be included in a decedent's estate. If the surviving spouse spouse A legal marriage partner as defined by state law is the beneficiary, this inclusion poses no difficulties because of the unlimited marital deduction Unlimited marital deduction An Internal Revenue Service provision that allows an individual to transfer an unlimited amount of assets to a spouse, during life or at death, without incurring federal estate or gift tax. allowed for all assets going to the surviving spouse. Should a child be the beneficiary, however, incidents of ownership by the decedent An individual who has died. The term literally means "one who is dying," but it is commonly used in the law to denote one who has died, particularly someone who has recently passed away. will cause the policy to be taxed in the decedent's estate unless a sufficient unified gift and estate tax credit is available. If the unified credit unified credit A credit used against federal taxes due on estates and large gifts. Under current law, the unified credit is sufficient to offset taxes on values of approximately $1 million in estates and large gifts. is insufficient, then the insured could consider an irrevocable Unable to cancel or recall; that which is unalterable or irreversible. IRREVOCABLE. That which cannot be revoked. 2. A will may at all times be revoked by the same person who made it, he having a disposing mind; but the moment the testator is life insurance trust that neither the debtor nor the debtor's creditors could reach or control. This irrevocable life insurance trust then would pass life insurance proceeds to the beneficiary free of both estate tax and creditor claims. Beneficiary Requirements The owner retains the right to change the beneficiary in every state except Virginia Virginia, state, United States Virginia, state of the south-central United States. It is bordered by the Atlantic Ocean (E), North Carolina and Tennessee (S), Kentucky and West Virginia (W), and Maryland and the District of Columbia (N and NE). . In Virginia, retaining the right to change the beneficiary causes the loss of all protection for exempting the cash surrender value. The state life insurance exemption statutes generally require that the insurance policy be payable to someone other than the insured, the insured's estate, executors or administrators. However, 12 states further limit the beneficiary designation DESIGNATION, wills. The expression used by a testator, instead of the name of the person or the thing he is desirous to name; for example, a legacy to. the eldest son of such a person, would be a designation of the legatee. Vide 1 Rop. Leg. ch. 2. 2. in order to qualify the insurance policy under the exemption statute. These states require the beneficiary to be a mix of the following: a spouse, child, sibling sibling /sib·ling/ (sib´ling) any of two or more offspring of the same parents; a brother or sister. sib·ling n. , parent, dependent or a dependent relative. (See "State Laws," column 3.) Timing Is Critical The best time to plan exemption strategies that survive Financial difficulties is before insolvency insolvency Condition in which liabilities exceed assets so that creditors cannot be paid. It is a financial condition that often precedes bankruptcy. In the context of equity, insolvency is the inability to pay debts as they become due; insolvency under the balance-sheet unexpectedly occurs--when a debtor has a positive net worth or assets exceed liabilities. It is difficult for a creditor to claim fraud that thwarts exemption planning when a debtor has enough assets to pay off all the debtor's creditors. To prevent creditors or the bankruptcy trustee from asserting as·sert tr.v. as·sert·ed, as·sert·ing, as·serts 1. To state or express positively; affirm: asserted his innocence. 2. To defend or maintain (one's rights, for example). fraud, it is best for the life insurance policyowner to pay insurance premiums when the owner is solvent solvent, constituent of a solution that acts as a dissolving agent. In solutions of solids or gases in a liquid, the liquid is the solvent. In all other solutions (i.e. . Exemption planning is not an illegal activity. What makes exemption planning a fraud on creditors depends upon the timing of an investment after a person becomes insolvent INSOLVENT. This word has several meanings. It signifies a person whose estate is not sufficient to pay his debts. Civ. Code of Louisiana, art. 1980.. A person is also said to be insolvent, who is under a present inability to answer, in the ordinary course of business, the responsibility . Fraudulent The description of a willful act commenced with the Specific Intent to deceive or cheat, in order to cause some financial detriment to another and to engender personal financial gain. intent is easier to prove when investments in exempt assets are made close to the time of bankruptcy filing. So it's it's 1. Contraction of it is. 2. Contraction of it has. See Usage Note at its. it's it is or it has it's be ~have best to prepare for hard times when things are going well, before catastrophes strike, such as a job layoff Layoff 1. When a company eliminates jobs regardless of how good the employees' performance. 2. A risk reduction, made by investment bankers, that minimizes the potential downside associated with a commitment to purchase and sell a stock issue unsubscribed by stockholders holding , long-term Long-term Three or more years. In the context of accounting, more than 1 year. long-term 1. Of or relating to a gain or loss in the value of a security that has been held over a specific length of time. Compare short-term. disability or a serious health problem, such as cancer. States vary on the time needed to fund cash surrender values prior to a bankruptcy filing. Some states require that the values be outstanding up to two years before a bankruptcy filing to qualify as exempt. (See "State Laws," column 4.) Other states just require a standard that prevents fraud against creditors. To prevent a fraud claim, the more time between sheltering exempt assets and the actual bankruptcy filing the better. States vary from protecting all cash surrender values to protecting none. The state of residence determines what exemption law applies. Wherever the owner resides, a life insurance policy investor should be aware of what amount is exempt. The debtor's state of residence may change prior to the bankruptcy filing. Under federal bankruptcy law, the debtor's residence is determined by the 180-day period before the date of bankruptcy filing. The exemption laws of the state where the policy is issued may not be the ultimate exemption law applied in bankruptcy, if the debtor moves to another state. Opting Out For other uses, see . Opting out is a political expression that was formulated in Canada to describe the exercise of a province to assume a program (within its own jurisdiction) for which the federal government offers, in part or in integrity, a financing and an States can "opt out" of the federal bankruptcy exemptions and most states have elected to do this. (See "State Laws," column 5.) For states that opt out, only the state exemptions are available. For states that do not opt out, the debtor can select either the federal bankruptcy exemptions or the state exemptions, but not both. The federal bankruptcy exemption for life insurance cash surrender value is $9,300. Under most state exemption laws, even though access is readily available to a debtor after a discharge in bankruptcy discharge in bankruptcy n. an order given by the bankruptcy judge, at the conclusion of all legal steps in processing a bankrupt person's assets and debts, which forgives those remaining debts which cannot be paid, with certain exceptions. , creditors are unable to reach the threshold to satisfy their claims. The trustee in bankruptcy trustee in bankruptcy n. a person appointed by a bankruptcy court to supervise the affairs of person or business which is in bankruptcy, determine both assets and debts, marshal (gather) and manage the assets if necessary, and report to the court. can take the life insurance policy cash surrender values that exceed exempt amounts allowed by statute. The owner can consider borrowing these excess amounts through policy loans and putting them into other exempt assets allowed in bankruptcy. A summary is provided for exempt amounts available from each state where the debtor may reside. (See "State Laws," column 4.) Planning for unexpected contingencies Contingencies (ISSN 1048-9851) is the bimonthly magazine of the American Academy of Actuaries, providing a large and diverse readership with general interest and technical articles on a wide range of issues related to the actuarial profession. by setting up life insurance policies that "allow for exempt cash surrender values can never hurt. Should tragedy strike, exemption statutes may protect the values and make financial recovery possible. Should policyowners live a long and prosperous life, people who have accumulating values have another asset to use for retirement planning Retirement financial planning refers to a collection of systems, methods, and processes which, in their aggregate, support a family unit's (client's) desire to achieve a state of financial independence, such that the need to be gainfully employed is optional. . Playing by the Rules Throughout the country, the rules that govern whether life insurance cash surrender values are exempt from bankruptcies vary by state. Some states follow federal bankruptcy exemptions, but many have adopted their own regulations as indicated in this chart. An explanation of chart categories is as follows: Opting out of federal bankruptcy exemptions: The state has elected to opt out of federal bankruptcy exemptions, so only the state exemptions apply. State statutes that are silent on opting out of the federal exemptions allow the debtor to choose either the federal or state bankruptcy exemptions. Exempt life insurance cash value: The maximum life insurance cash surrender value a life insurance policyowner can exempt from creditor claims. Federal bankruptcy: Electing federal bankruptcy exemptions is required to claim this exemption amount. Beneficiary exemptions: spouse (S); child (C); sibling (BS); parent (P); dependent (D); dependent relative (DR); or no restriction restriction - A bug or design error that limits a program's capabilities, and which is sufficiently egregious that nobody can quite work up enough nerve to describe it as a feature. (NR).
State Law for Exempt Life Insurance Cash Surrender Values
#1 #2 #3 #4 #5
Problem if Requires Opting out
insured is not noninsured of federal
also policy beneficiary bankruptcy
State owner also be: Amount exemptions
Ala. No NR All Yes
Alaska No NR $10,000 Yes
Ariz. No S, C, BS, P or D $25,000 if
outstanding
2 years Yes
Ark. Then must be D NR $9,300
(federal
exemption) No
Calif. No NR $8,000 Yes
Colo. Yes NR $25,000 if
outstanding
2 years Yes
Conn. Yes NR All No
Del. -- -- None Yes
D.C. Then must be D NR $9,300
(federal
exemption) No
Fla. Yes NR All Yes
Ga. Then must be D NR $2,000 Yes
Hawaii Yes S, C, P, or D All No
Idaho Then must be D NR $5,000 Yes
Ill. Yes S, C, P, or D All Yes
Ind. Then must be D S or DR All if out
outstanding
1 year Yes
Iowa No S, C, or D All; but only
$10,000 if
contributed
within
2 years Yes
Kan. No NR All if
outstanding
1 year Yes
Ky. No NR All Yes
La. No NR All Yes
Maine Then must be D NR $4,000 Yes
Md. Yes S, C, or DR All Yes
Mass. Then must be D NR $9,300
(federal
exemption) No
Mich. Then must be D NR $9,300
(federal
exemption) No
Minn. Then must be D NR $9,300
(federal
exemption) No
Miss. Yes NR All; but only
$50,000 if
contributed
within 1 year Yes
Mo. Then must be D NR $150,000 if
outstanding
1 year Yes
Mont. No NR $4,000 Yes
Neb. No NR $10,000 Yes
Nev. No NR $1,000 per
month Yes
N.H. Then must be D NR $9,300
(federal
exemption) No
N.J. No NR All No
N.M. No NR All No
N.Y. No NR All Yes
N.C. No S or C All Yes
N.D. No S, C, or D $100,000 per
policy with
$200,000 Yes
total if
each is
outstanding
1 year
Ohio Yes S, C, or D All Yes
Okla. No NR All Yes
Ore. No NR All Yes
Pa. No S, C, or DR All No
R.I. Then must be D NR $9,300
(federal
exemption) No
S.C. Yes NR $4,000 Yes
S.D. No S or C $20,000 Yes
Tenn. Yes S, C, or D All Yes
Texas No NR All No
Utah No NR $5,000 Yes
Vt. No NR All No
Va. No NR None; but if
cannot change
beneficiary
then All Yes
Wash. No NR All No
W. Va. Then must be D NR $8,000 Yes
Wis. No NR $9,300
(federal
exemption) No
Wyo. -- -- None Yes
Kenneth A. Hansen Han·sen , Gerhard Henrik Armauer 1746-1845. Norwegian physician and bacteriologist who discovered (1869) the leprosy bacillus. is a professor in the department of accounting and business law at the University of North Dakota North Dakota, state in the N central United States. It is bordered by Minnesota, across the Red River of the North (E), South Dakota (S), Montana (W), and the Canadian provinces of Saskatchewan and Manitoba (N). . |
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