With all the covid concerns, people are starting to think about their mortality. Usually this type of contemplation comes with age, however, no one is guaranteed a long life. I will be posting several common scenarios over the next few weeks. This post is not intended to give legal advice nor create an attorney client relationship. If you wish to schedule an appointment to discuss your situation and estate planning needs, you can either reach out on this platform, schedule a virtual meeting, email, or call our office.
Scenario 1:
28 year old person, Sam, who isn’t married, no children, and doesn’t own a home. He owns a high mileage, late model car, has a bank account in his sole name with $2,500. He is currently employed. His employment benefits are a 401k which he doesn’t contribute to and a life insurance policy 1x his base salary. He has $7,000 worth of credit card debt and has $30,000 in student loans. Sam is engaged to his long time significant other. Sam dies unexpectedly from a brain aneurism. Sam did not have any estate planning documents.
Since Sam did not have a Will, his estate will be intestate. This means that the default rules to determine heirs, set by the State of Indiana, will be used to determine who Sam’s solely owned assets (his estate) will be given to. Sam’s default heirs are his parents since Sam was an unmarried person without children. His fiancée is not entitled to any of Sam’s estate.
What is in Sam’s estate? All the things he owned, this includes assets and debts. His estate includes the funds in his bank account ($2,500), the employee benefit life insurance policy ($55,000), the credit card debt (-$7,000) and his student loans (-$30,000). Usually, student debt is discharged in the event of death, however, discharged debt is considered taxable income. So, Sam’s estate will have a tax bill from what the IRS sees as $30,000 of income. Estate tax rates, in this scenario, would be around 40% for income over $12,000. Then estate assets would then be used to pay estate expenses and tax consequences prior to distributions of the estate.
However, it didn’t have to be this way. A little bit of planning could have moved the life insurance out of the estate, directly to the beneficiary of Sam’s choosing. The student debt would still have been discharged at death and a tax liability would still have been generated, however, the largest asset would have been protected from creditors, even federal government creditors. Remember, liabilities or debts solely owned by the decedent are never passed out from an estate to beneficiaries. If an estate doesn’t have enough assets to pay debts or liabilities, then the estate is insolvent – and it’s just too bad so sad for any creditors – and creditors won’t get paid.
JRW @jrwlaw.llc
JRW Law, LLC is an Indianapolis Law Firm ready to help with your Estate Plan. Contact for questions or set up a legal consultation today.
