Ask the Experts!

Here’s the question of the day, answered by guest expert Steve Fichtenbaum.  Steve is an estate planning attorney whose practice is based near New York City.

Question: What’s the biggest estate planning mistake people make?

Answer: I see husbands and wives cross-own life insurance policies and name their children as beneficiaries.  This mistake is especially common in second marriages, where the wife will own the policy on her husband’s life and name her children as beneficiaries.

Any time a personal life insurance policy has three different parties involved as owner, insured, and beneficiary, the potential exists for an inadvertent gift at the insured’s death.   In my example, at the husband’s death, the wife will be considered to be making a taxable gift of the entire death proceeds to the child.  She would have to file a gift tax return, use all or part of her exemption amount, and possibly pay gift taxes on the transfer.

In the example, it would be smarter for the wife to name herself the policy beneficiary, or for the husband to own the policy and name his wife’s children the beneficiaries.

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