How Life Insurance Can Be Part of Your Estate Plan

concept of life insurance

Life insurance may not seem to have a bearing on how to dispose of assets in your estate plan, but you might like what you find if you look a bit deeper. Life insurance can be an integral, indispensably important part of a well-thought-out estate plan. And policies aside, there are numerous other benefits to owning and providing a large sum of money to beneficiaries.Life Insurance

  • Life insurance provides quick cash upon death that can pay debts, final income taxes of the insured, and often funeral expenses. Life insurance cash can also pay estate taxes and avoid the forced sale of assets.
  • The proceeds will pass to the named beneficiary typically free of income tax.
  • Proceeds can transfer to a trust as part of a will the insured created for the benefit of minor children, persons with special needs, or elderly relatives.
  • The proceeds of a life insurance policy can be payable to someone other than the insured's estate and avoid passing through probate when owned by an irrevocable insurance trust. For example, the funds can pay marital settlement obligations for spousal or child support.
  • If the insured owns a closely-held business, proceeds can fund a buy-out of the decedent’s interest.
  • Proceeds, when directed by proper beneficiary designations, can escape probate, saving time and money.

Do not underestimate the importance of having cash funds immediately available in an uncomplicated way. Often the passing of a loved one or family member comes with a string of expenses that exceed cost expectations. Much of what Americans have resides in investments like 401ks, IRAs, housing, and other illiquid assets with very little cash on hand. Life insurance proceeds protect families from having to force the sale of these assets at possibly unfavorable tax rates. Some inheritable assets come with immediate payment requirements. Homes not fully paid off, cars, and the like can leave families with short-term liabilities requiring cash.

Understanding Estate Planning Strategies

One of the more popular estate planning strategies that fit many situations is an irrevocable life insurance trust (ILIT). Though a beneficiary or third party cannot rescind the trust, modify it, or amend it post creation, an ILIT still offers heirs several financial and legal advantages. These advantages include asset protection, favorable tax treatment, and assurance that beneficiaries use the proceeds in a manner concurrent with the benefactor's wishes. Typically, life insurance policies are the chief assets held in an ILIT.

Before purchasing a policy, particularly if you want to create an ILIT, speak with your estate planning attorney regarding potential income and estate tax consequences. If you have an estate large enough, it could be subject to federal and state estate taxes depending on the applicable laws in place at the time of your death. Your ILIT should be in place before binding a life insurance policy to it. Remember that states have different laws regarding ILITs; to avoid problems, your ILIT must follow your state's rules.

Using a Gifting Strategy for your Life Insurance Plan

Beneficiary word on checks as payouts of life insurance policiesIt is possible to gift an existing life insurance policy to your ILIT. Unfortunately, if you were to die within three years of making the gift, the policy amount can be included in your estate for tax purposes due to a rule known as a lookback period. In effect, this isn't making the policy proceeds taxable, but it adds the policy proceeds amount to the total value of the estate, in turn making it part of your estate subject to taxes. As federal estate tax exemption amounts frequently change, it is prudent to fund your ILIT by purchasing a new policy. Doing so will avoid the possibility of a lookback period.

When using an ILIT, issues around marital status are key. Choosing between variations of permanent life insurance for your ILIT, such as whole standard life, universal life, and variable life, can be confusing, and a qualified agent can guide you to your best option. Estate planning attorneys, Jana included, often know many such agents and can recommend someone well suited to you and your needs.

If you own a business, life insurance can be an excellent way to plan for your estate. Perhaps only one child wants the own the business; life insurance can offset that inheritance and provide an equal value to other children. In other words, the life insurance proceeds can provide the cash to buy out those uninterested inheritors' business interests while leaving the business intact. Blended family systems can also benefit from life insurance payouts to ensure that all children receive an inheritance, not just the children of the last surviving spouse.

Life insurance should be a part of your family estate plan. It can increase the wealth your heirs inherit and provide a ready source of cash for immediate financial obligations after your death. Which form best suits your needs will depend on your age and situation. Speak with your estate planning attorney about how a life insurance policy can be an effective way to transfer wealth to your beneficiaries.

Protect your loved ones today contact McCreary Law Office or call the Jacksonville, FL office at 904-425-9046 or the Houston, TX office at 713-568-8600.

Attorney Jana McCreary

Jana R. McCreary's Profile Image
Houston Estate Planning and Elder Law Attorney Jana R. McCreary has been an attorney for over eighteen years, a career move she made after working for over a decade with adults and children with intellectual disabilities and mental illness. Graduatin… Read More

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