Don’t just drop a life insurance policy you no longer want.

don’t just drop a life insurance policy you no longer want. Instead, review the policy with an independent life insurance agent 

Dear Len & Rosie,

My father just passed away. He was 82-years-old and was not in good health, especially after my mother’s death. He had a $45,000 life insurance policy. When we were getting his affairs in order after his passing, we sent in the information to the insurance company to claim his life insurance. We found out that in September 2006 my father cashed out the policy for only $12,000. We cannot believe this.

There are five children. We think our father was taken advantage of due to his age, health and state of mind due to the passing of his wife. He had suffered a type of stroke that sometimes made him frustrated and frequently he could not remember what he was trying to say. We do not believe he cashed out the policy of his own accord. Is there a way to go back to the insurance company and argue that my father was not really capable of making this decision? Who would cash out a $45,000 insurance policy for only $12,000?

Kathleen

Dear Kathleen,

It’s more likely than not that your father’s $45,000 life insurance policy had a cash surrender value of only $12,000, which is why he received only that much when he turned his policy back in to the insurer. Whole life insurance policies are part insurance (the $45,000 face value), and part investment (the $12,000 cash surrender value).  The cash surrender value increases over time and eventually can exceed the face value of the policy.

As a rule, cashing in a life insurance policy is almost never a good idea, because you can frequently sell a policy to investors for more than its cash surrender value, or even trade in an old life insurance policy for a fully paid up policy in a tax-free exchange. We may never know why your father did it, unless the insurance company recorded his conversation with them for “quality control purposes”, which isn’t so likely.

What probably happened was that your father decided that he had bought this insurance to take care of your mother, and that he didn’t need to be paying additional policy premiums because she passed away before him. The insurer isn’t going to accept your explanation of your father’s mistake at face value.

If your father were in a conservatorship at the time he canceled the policy, then his action was and is legally void. Because he was not in a conservatorship, his action is legally voidable. However, to void the transaction, you would have to petition the court and prove that your father was, in September 2006, incapable of making his own decisions and protecting himself from undue influence.

This will be difficult to prove, especially if your father was living independently, driving, paying his own bills more or less on time, and otherwise getting through the day on his own. Unless he was clearly and severely incapable of doing anything to provide for himself, you will likely lose, and any money you spend on lawyers going after this insurance policy will be throwing good money after bad.

For the rest of you readers, don’t just drop a life insurance policy you no longer want. Instead, review the policy with an independent life insurance agent who isn’t wedded to a single insurance company to see if you can sell it for more money than you’d get if you surrender the policy, or even trade it in.

Len & Rosie

Living Trusts, Limited Partnerships and Corporations.... Are your assets really protected?

Dear Len & Rosie,

My husband and I have a living trust which includes a family limited partnership for rental houses and my one-person business corporation. I am having concerns that things might not have been completed. For example, the living trust has a Schedule A with our assets listed, but I've heard that my corporate stock needs to be assigned to the living trust and that the properties need to be deeded. Is this true? How do I do this?

Karen

Dear Karen,

Think of your trust as a large wicker basket. Everything in the basket avoids probate. Everything outside of the basket is subject to probate on your death unless it avoids probate by other means, such as joint tenancy or pay-on-death beneficiary designations. You and your husband need to fill the basket by transferring the title of your assets to yourselves as trustees. If the title to your home says “Bob and Karen, as Trustees of the Bob and Karen Revocable Trust dated January 1, 2014”, then your home is in the trust. Otherwise, it’s outside of the trust and may be subject to probate upon your deaths.

It’s possible to avoid probate if your trust is not funded. Assets found on a schedule of trust assets attached to your trust can sometimes be transferred into the trust by means of a court order. It’s faster and easier than probate, but should not be considered as a substitute for funding your trust. It requires going to court, and depending on the circumstances and the exact language within your trust document, it may not work.

When you and your husband created your trust, you each should have executed “pour-over” wills. These wills are very simple and do little more than nominate an executor and leave the estate to the successor trustees of your trust. What they really say is this: “Dear Judge, I’m a big dummy because I didn’t fund my expensive trust before I died. Please pay outrageous probate fees to a lawyer selected by my children. Leave what’s left to my trust so my estate plan won’t be messed up any more than it is already.” 

Review your wills to make sure they leave your estate to the trust. Pour-over wills are a safety net to protect your estate plan if you mess it up.

Most estate planning lawyers prepare deeds to fund their clients’ real properties into the trust when the trust is created. If your home is not in the trust, you need to have a lawyer or a title company prepare a deed conveying the property into your trust. You should also reissue your corporation’s stock to the trustees of the trust. However, the rental properties you own within your family limited partnership should not be in the trust. Instead, these properties should be titled in the name of the partnership. Your interest in the partnership can be transferred to the trust, so that the partnership will avoid probate upon your death, but that also requires a review of your partnership agreement.

If you are still confused, you should review your trust with a trust and estates attorney. Creating a trust is only half the job. You need to finish it by properly funding your trust.

Len & Rosie