Estate planning is all about anticipating the unexpected. Life insurance is all about protecting those you love when the unexpected occurs. Including a life insurance policy in your estate plan can provide financial support for your family and reduce tax burdens.
Life Insurance Plan: How Can It Complement with Estate Planning?
Incorporating life insurance into your estate plan offers many advantages. The obvious one is that it offers financial protection for your loved ones. This can give you peace of mind, particularly if you’re the main breadwinner in the household. Let’s take a look at other ways a life insurance policy complements an estate plan.
Provides Liquidity for Estate Expenses
After death, there may be many expenses that your family and your estate incur. With a life insurance policy, your family might not have to liquidate assets to generate money for paying expenses. Or if they must liquidate some, it won’t be as much as if there were no insurance policy. Let’s look at some typical expenses that may arise.
The national median cost of a funeral is over $7,000, according to the National Funeral Directors Association. During this time of grief, the last thing you want your family to worry about is how they are going to properly bury and honor you. Life insurance proceeds can alleviate this burden and be used to pay funeral expenses.
When a person dies, their debts don’t disappear. Instead, they become a financial obligation of the estate, and they must be paid before any distributions are made to heirs. If your family has to sell off assets to pay your debts, that reduces what’s leftover for them in your estate. Instead, the insurance payout can be used to satisfy your debts.
Final income taxes and estate taxes
As the saying goes, there are two things in life you can’t avoid—death and taxes. Your estate must pay any back taxes and income taxes owed for the year of your death. Additionally, if your estate is subject to estate tax, the insurance proceeds can be used to pay those as well.
Probate is the process of settling and distributing a deceased person’s assets. It can be a long and expensive process, but with proper estate planning, not all assets have to go through probate. As long as there is a named beneficiary on the policy, life insurance proceeds don’t go through probate. This is advantageous because the insurance proceeds are not included in the value of the estate. Also, the payments are private, whereas every distribution made during probate is part of the public record.
Faster Payouts for Beneficiaries
When the life insurance policy holder dies, the beneficiaries automatically get the payout. On the other hand, distributions from an estate have to go through the probate process, which can take months and even years in some cases.
If your estate is made up of a variety of assets with different values, it may be hard to equitably divide your estate. For most, the goal is to be fair when deciding on the inheritance for your loved ones. A life insurance policy can help with this. You can use the death benefit proceeds from the policy to equalize the value of assets. For example, you could leave your house to one child and the insurance death benefits to the other.
Should You Use a Life Insurance Trust?
Not all estates need a sophisticated trust like a life insurance trust. But if you do, it can offer significant tax benefits.
What Is a Life Insurance Trust?
A life insurance trust is an irrevocable trust where the trust is both the owner and beneficiary of the life insurance policy. These are also known as irrevocable life insurance trusts (or ILITs) and are meant to provide financial security for your family after you pass away.
To create an ILIT, you (the grantor) select a trustee to manage the assets in the trust and name your family (or whoever you wish) as the beneficiaries. Then, purchase a life insurance policy, name the ILIT as the beneficiary, and transfer the policy to the ILIT. At this point, you no longer own the policy but rather the ILIT does. At your death, the insurance proceeds go to the ILIT, and your beneficiaries have access to the funds.
ILITs Are a Way of Tax Planning
If you die as the owner of a typical life insurance policy, the death benefit amount of the policy is included in the value of your estate. The beneficiaries don’t have to pay income tax on the payout amount, but your estate may owe estate taxes. Estates that surpass a certain dollar amount are subject to both federal estate tax and New York estate tax.
Using an ILIT can help you avoid estate taxes on the life insurance policy. By having the ILIT as the policy owner rather than the grantor, the death benefit is not included in the estate’s value.
Although trusts are effective estate planning tools, they’re not for everyone. If you want to discuss the possibility of using an ILIT in your estate plan, contact the Law Office of Andrew M. Lamkin, P.C. We’ll be happy to create a comprehensive estate plan for you, which may include a will/trust and advance directives (e.g., living will, durable power of attorney, and health care proxy).
The Law Office of Andrew M. Lamkin, P.C. Can Help With Your Estate Planning Needs
Life insurance is a powerful estate planning tool when used properly. To learn more about life insurance and ILITs, attorney Andrew M. Lamkin can answer your questions. As an experienced estate planning lawyer, Mr. Lamkin has been helping clients in New York plan their legacies for over 15 years. To schedule a free consultation with Mr. Lamkin, call or go online to request an appointment. He can meet with you in his office or at your home.