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  • Betsey Rubel

Life Insurance as an Estate Planning Tool

When assessing a client’s estate planning needs, life insurance is often one of the largest and most important assets in an estate. I almost always recommend that a client consider purchasing a life insurance policy if they don’t already have one in place. From an estate planning perspective, I find there are four primary uses for life insurance. Do any of these apply to your situation?

  1. Life insurance to pay funeral and burial expenses. In an estate without liquid cash, insurance is often needed to pay the immediate funeral and burial expenses. Funeral expenses can easily cost in excess of $10,000 and payment arranges need to be paid at the time of planning. If the deceased had a life insurance plan, a funeral home will accept an assignment of the funeral amount from the policy as payment. By using a life insurance assignment, a family can avoid scrambling to find cash for funeral expenses at this already stressful time.

  2. Life insurance to fund a trust for a young family. Term life insurance can be economical for young, healthy individuals. A young couple having their first child can obtain a thirty year term policy for a large amount ($500,000 plus) at an affordable monthly cost. Using such a policy to fund a trust is an easy, effective way to ensure that a surviving spouse can pay off a mortgage, pay for college and be able to live comfortably in the event of a death of a spouse. When I meet with families to discuss what provisions they desire in their trust, usually paying for college and providing for their kids are at the top of their list of must-have provisions in a trust. However, early in a client’s career, there often isn’t a large retirement policy or sufficient amounts of cash available to be able to fully fund a trust according to the wishes of the client. A life insurance policy that names the family trust as a beneficiary is an easy way to ensure your trust contains enough assets to carry out the distribution plan.

  3. Life insurance with multiple beneficiaries for blended families. When I meet with clients who have blended families, one of the most difficult considerations is to determine how much of the estate to leave to your spouse, how much to leave to children from a previous marriage as well as how to divide assets when you have children with a large span of ages. Many times a client wants to be able to give an immediate gift to one party, but then provide for continuing funds for another party. By playing with beneficiary designations on life insurance policies, we can easily accomplish both goals. For example, a client can name a spouse as a 50% beneficiary of a life insurance policy, and a trust specifically for the client’s minor children as the other 50% beneficiary.

  4. Life insurance to pay estate taxes. Although not as common in today’s tax environment, for clients who have taxable estates (estates in excess of 5.43 million per person in 2015), life insurance can be an important tool in a large estate. As a hefty tax is owed in the months after death, having life insurance proceeds available to pay the tax is important as it doesn’t require a trustee or personal representative to liquidate assets to pay the tax and does not further add to the value of the estate, thus increasing taxes further. This goal is accomplished through the creation of an Irrevocable Life Insurance Trust (ILIT). An insurance policy can be transferred or purchased by an ILIT however the client cannot be the trustee or exercise any ownership over the trust. Therefore, another individual (often a spouse or adult child) can serve as trustee of an ILIT and make the premium payments on the policy. At death, the assets of the ILIT are not included in the estate of decedent and can then be used to pay any estate taxes without having the life insurance amount included in the estate.

In conclusion, it is important to assess your life insurance needs and how they relate to your estate plan on an ongoing basis. As you age and your children reach different stages and milestones, you should reexamine how your life insurance plan works to accomplish your goals.

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