Life Insurance In Estate Planning
Life insurance can be critical in providing financial security to loved ones in the event of an unexpected death. Many people, however, may overlook other important roles that life insurance can play in securing their legacy and providing for heirs. The following are some, but not an exhaustive list, of the uses for life insurance as part of your estate plan as shared by a family private office lawyer:
Liquidity For Estate Taxes, Debts, Or Other Expenses
Upon your death, your estate may owe estate taxes or other financial obligations such as debts, funeral expenses, medical bills, or student loans. Without the liquidity provided by a life insurance policy, your executor or trustee may be forced to prematurely sell assets or property at inopportune times resulting in loss of value or unfavorable tax liabilities. For example, a family home that was intended to be maintained for minor children or children with special needs may need to be mortgaged if the estate doesn’t have the liquidity. Additionally, an executor or trustee may have to sell during a temporary decline in a stock portfolio to pay taxes or debts when holding through the decline would have otherwise resulted in more assets for the beneficiaries.
Tax Advantages
Most people are aware that life insurance proceeds pass income tax free to heirs and selected beneficiaries as our friends at Aptt Law LLC can explain. Indeed, this is usually the primary selling point. Less frequently discussed is the fact that life insurance is used in calculating your gross estate which can increase your estate tax liability resulting in less assets being passed on to your heirs. When combining life insurance with the power of an irrevocable life insurance trust (ILIT), life insurance proceeds can be removed from your gross estate resulting in a truly tax-free transfer.
Business Continuity
For people with closely held family businesses, life insurance can provide a means of succession planning, key person insurance, debt coverage, or deferred compensation. For example, buy, sell and redemption agreements provide the capital needed for one (or multiple) members or shareholders to purchase the decedents shares. Of course, if not done correctly, life insurance proceeds can actually increase the value of business. Therefore, the structure of buy-sell agreements and redemption agreements must be carefully done to avoid unnecessarily increasing the value of the decedents gross estate, resulting in a higher tax liability.
Equalizing Inheritance
Many people wish to provide for their children equally. When an estate consists of assets such as real estate, art, heirloom jewelry, or business interests, it is not always practical or desirable to sell those assets. Particularly when, for example, you have four children and you want to give one the house, one your jewelry, and one the family business. The proceeds from a life insurance policy can be used to offset the different values in gifts creating equalized inheritance.
How To Implement Life Insurance In The Estate Plan
Implementation starts with identifying your goals and learning about your options. It is usually best to start with your financial advisor or life insurance agent. An attorney can help you determine how to properly structure your estate plan to get the most out of your life insurance — contact one near you today.