Often when we think about the assets in our estate, we think of things we have immediate access to: real estate, bank accounts, retirement accounts, stocks, etc.  However, life insurance policies are considered assets of your estate, even though the funds do not exist in your estate until after your passing. Life insurance can help provide funds to pay estate taxes and offers wealth-protecting benefits, by providing an effective way to transfer wealth to your beneficiaries. These policies can be for substantial amounts, and significantly increase the value of your estate, and should be considered when planning.  An otherwise modest estate during life could be a substantial inheritance upon the policy owner’s death. Whatever your needs, life insurance can be a valuable element in your estate plan when used in conjunction with a trust to offer the following benefits:

 

1. Liquidity: For many people, particularly in Southern California, their wealth is in real estate or businesses.  Upon the passing of the owner of these assets, cash is often needed immediately to cover taxes, mortgages, and the costs of administering the estate and handling the possible sale of these assets.  Life insurance policies are typically paid out quickly and can provide the necessary funds to cover these expenses.
2. Equalize Blended Family Inheritances: These days, blended families are more and more common, as people remarry after deaths or divorce.  Typically when people divorce, they do not want to leave inheritance to their former spouse, but do still want to provide for their children from that first marriage.  A life insurance policy where the children of the first marriage are the beneficiaries provides them with that financial benefit upon the passing of their parent, while the actual estate can be left to the family of the current marriage.
3. Equalize Family Business Inheritance:  Similar to the above situation, life insurance can help equalize a family business inheritance where the business founder/owner has multiple children, but only one or some of them have been involved in the family business, and stand to inherit the business.  If the business is one of the largest assets of the estate, it may present difficulty when attempting to equitably divide assets to beneficiaries. A life insurance policy can provide cash to even out distributions.
4. Cover Estate Taxes:  If you have an individual estate with a net value of more than $5.49 million (estate exemption for 2017) your estate would likely be subject to the federal estate tax of 40%.  To help cover those taxes, a life insurance policy can be purchase, with the proceeds to be used upon death to pay the taxes on the estate.  The key to this is to own the life insurance policy in a separate irrevocable life insurance trust so the value of the policy is not included in the value of your estate and then also taxed.
5. Give to Charity:  A life insurance policy provides two options to gift to a charity while still providing for your descendants: (1) name the charity as the beneficiary of the policy and your descendants inherit your estate; or the reverse of that, where (2) your descendants are the beneficiaries of the life insurance, and your estate goes to the charity.  All charitable giving is tax-free and provides a charitable deduction.  A large estate could benefit from the charitable deduction, and a small estate could make a much larger contributions to their favorite charity than outright cash or even appreciated property.

Many people are unsure how to use life insurance as part of their estate planning. Owning life insurance in conjunction with a living trust guarantees that ample funds will be available to care of your loved ones. If you need help planning with your life insurance, we’d be happy to get you started. Get in touch.