Life insurance death benefits - Q&A: Question about life insurance, death benefits, and taxes?

New Jersey Pension Loan

When my mom passes away, (which will probably be in the next year or so,) my brother and I will receive a payout from her group life insurance policy since she was under 60 (she is suffering from cancer,) and also will receive a ‘payout’ of the balance of her pension ‘retirement reserve’ from the state of New Jersey, since she was a Teacher and it was the retirement plan she chose.

I’m on my own here. I know Y!A isn’t the best place to solicit financial advice but I’m only 23 and don’t have much family besides my father who divorced my Mother and doesn’t want to handle her estate.

My questions are:
1.) Are the beneficiaries of pensions and insurance policies protected from creditors of my mother’s estate? She is going to pass away with A LOT of debt. (Foreclosure, student loans for a masters she never finished, med bills, cancer will do that to a person’s wallet…) My brother is autistic so I want to set up a trust to with that money to make sure he is taken care of if anything happens to me as well.

2.) Are there inheritance taxes on these same benefits?

3.) Should I just hire an accountant when she passes? It’s a six figure sum of money I’m talking about so I don’t want to screw around and get in trouble.

Thanks a lot for any help

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Answered by Woof

You will need both an attorney and probably an accountant to help after your mother passes.

Life insurance benefits are paid DIRECTLY to the named beneficiary(ies). They are not part of her estate and cannot be “intercepted” by her creditors. If your brother is a beneficiary and is not mentally competent to manage his own affairs (or is a minor), a trustee will be needed to manage the money for him.

The pension “inheritance” is going to depend on the terms of the specific pension plan – no one here can say.

There are no FEDERAL “inheritance taxes” on life insurance benefits. You’ll have to check on NJ – all the more reason you’ll need professional assistance. I hope she has a current will/estate plan in place – that would make things much easier later on.

Answered by LadyJane

Does she have a current will and/or a living will? If not, get her to get one- and fast. If there is no will everything will wind up going to probate and they’ll liquidate her assets to pay her debts and will come after any beneficiaries of her accounts if they need more money to pay the debts. You will more than likely wind up with nothing.

Make sure she has YOU or your brother as her beneficiaries on everything. If your father doesn’t want to deal with the estate, he also should not receive anything.

Once she has a will, pay the couple hundred dollars to speak with a lawyer to find out the best way to handle things. Whomever is listed as her executor/executrix on the will, has the responsibility to settle the estate. That means to personally payoff all the debts. Most inheritances of over $ 13,000 (I believe) are taxed at a high rate, so expect to pay 30-40% taxes.

If she currently owns anything with loans (a home, a car, etc), you will have to keep those payments current with money you get until you sell them, or the bank will take them from you. I do not think an accountant is necessary, though you may want to talk to a financial planner who can help to set up the trust fund for your brother and maybe some sort of account for yourself. I would interview a couple now and choose one so you can develop a relationship with them, or get recommendations from friends or family. Always better to deal with semi-familiar faces when the time comes than to throw your money at a stranger and ‘hope’ he does the right thing.

Sorting out an estate is difficult, especially one with debts, so to make sure you don’t do something wrong and have the IRS knocking on your door. If you’re not confident with what you’re doing I would definitely seek help from those who have experience. Good luck!

Answered by kelby7670

You will need an attorney. Start looking now and find one you like and trust. Let him hire the accountant. Let him do everything, that’s what he is paid for. All you will have to do is answer his questions and sign your name a lot.

Answered by tro

if you plan to administer the estate you need to become informed about the obligations etc.
the estate will pay all the obligations your mother has in her assets
either you do some research on your own or you contact a good financial planner to help you
for your brother you will need to set up a trust for him from the inherited money

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