At first glance, life insurance may not seem related to the distribution of money and property in your estate plan. However, it can be an integral and important part of a well-drafted estate plan. In addition to providing a sizable sum of money to your heirs, a life insurance policy offers other benefits. These include the following: provides immediate cash upon death that can pay debts, final income taxes of the insured, and funeral expenses can pay estate taxes and avoid the forced sale of assets proceeds of a life insurance policy will pass to the named beneficiary free of income tax proceeds can be transferred to a trust as part of a will that the insured had created for the benefit of minor children, special needs, or aging relatives proceeds can be payable to someone other than the insured's estate when owned by an irrevocable insurance trust (For example, the funds can pay marital settlement obligations for spousal or child support.) a policy can fund a buyout of the insured's interest in a closely held business proceeds transfer to your loved ones outside probate, the court process of validating one's will Life insurance ensures your loved ones have cash funds immediately available. Often, the passing of a family member comes with unexpected expenses. Many Americans have investments such as real estate or retirement accounts like 401(k)s. However, these types of assets are not liquid. Having liquid assets available when a family member dies can prove crucial. It allows for immediate access to cash funds for such expenses as funeral costs or outstanding debts. Without liquid assets, loved ones may face financial strain. They may have to wait for lengthy probate processes before they can access certain other assets. This can cause unnecessary stress during an already difficult time. Life insurance proceeds protect families from having to force the sale of homes and other investments at unfavorable tax rates. For example, you may have a home or a car that you have not paid off. If you passed away, this could leave your family with short-term liabilities requiring cash to make ongoing payments. Understanding Estate Planning Strategies With a Life Insurance Policy One of the more popular estate planning strategies that fit many situations is an irrevocable life insurance trust (ILIT). An ILIT can hold a life insurance policy outside the insured person's estate. This ensures that the proceeds are not subject to estate taxes. So, the policy helps provide financial security for your loved ones without being part of the taxable estate. You cannot change or revoke an ILIT once you have set it up. A beneficiary or third party also can’t rescind the trust, modify, or amend it. However, heirs gain several financial and legal advantages with an ILIT. These include asset protection, favorable tax treatment, and assurance that they will be using 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 life insurance policy, particularly if you are seeking to create an ILIT, it is always a good idea to speak with an estate planning and elder law attorney at Elville and Associates. They will be able to walk you through the potential income and estate tax consequences. If you have an estate large enough, it may be subject to federal and state estate taxes depending on the applicable laws in place at the time of your passing. Ensure that your ILIT is in place before binding a life insurance policy to it. Remember that states have different laws regarding an ILIT; to avoid problems, your ILIT must follow your state's rules. Using a Gifting Strategy for Your Life Insurance Plan You may be able 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 may be included in the total value of your estate for tax purposes. This is because of a rule known as a "lookback period." Federal estate and gift tax exemption amounts also frequently change. So, it’s prudent to fund your ILIT by purchasing a new policy instead. Doing so will avoid the possibility of a lookback period. When using an ILIT, consider your situation before purchasing your life insurance policy and designating beneficiaries, such as whether you are married or single. Choosing between variations of permanent life insurance, such as whole standard life, universal life, and variable life insurance, can be confusing. An estate planning attorney can help guide you in these and numerous other financial affairs. If you own a business, you may have one adult child who wants to take over the business. Your other children might not be interested or involved in the enterprise. Life insurance proceeds can provide the cash to buy out the other siblings’ interests while leaving the business intact. Blended families can also benefit from life insurance payouts, too. For example, they can ensure that all children receive an inheritance, not just the children of the last surviving spouse. How to Ensure Your Estate Plan Includes Life Insurance Life insurance should be a part of your family estate plan. It can increase the wealth your heirs inherit. It also can provide a ready source of cash for immediate financial obligations after your death. Which form of life insurance best suits your needs will depend on your age and situation. Speak with an estate planning and elder law attorney at Elville and Associates about how you can effectively use a life insurance policy to transfer wealth to your loved ones. The attorneys at Elville and Associates will also offer proper guidance on the types of estate planning documents that will best serve your needs. #elvilleeducation
