Incorporating life insurance into your estate plan can serve a number of important purposes, from providing your spouse with the financial stability to keeping a privately-owned business in the family. Purchasing life insurance, and potentially establishing an irrevocable life insurance trust (ILIT), can serve as a form of asset protection as well.
As estate planning lawyers, we are frequently asked questions about life insurance. What does life insurance cover, exactly? Do I need it? Are the television and radio commercials advertising life insurance for a low monthly payment legitimate? If I buy life insurance, is the insurance company actually going to pay after I die?
The common confusion about life insurance is understandable. Not only can it be difficult to find reliable information (much of what you might read online is published by insurance companies and brokers who are trying to get you to buy life insurance and is often heavily biased), but there are also many different options when it comes to buying life insurance for estate planning purposes. In this article, we provide an introduction to the potential benefits of incorporating life insurance into an estate plan, and we also explain why some people may find it beneficial to form an irrevocable life insurance trust (ILIT).
Who Should Consider Incorporating Life Insurance into Their Estate Plan?
As with all estate planning tools, buying life insurance is not right for everyone. If you do not need it, then there is no point in paying the monthly or annual premiums. However, due to its relative low cost (in most cases) and its potential benefits, many people will find it worthwhile to purchase life insurance as part of the estate planning process. For example, individuals who may benefit from utilizing life insurance for estate planning purposes include:
- Employees who have access to life insurance through their employers – Many employers offer life insurance as a benefit to their employees. If you have access to life insurance through your employer for a few dollars per month deducted from your paycheck, this may be a cost-effective way to provide your family with some added financial stability in the unexpected event of your untimely passing.
- Spouses who have limited income prior to or during retirement – If your spouse would face financial struggles after your death due to limited income, then a life insurance policy may be well worth the investment.
- Spouses and parents with sizable debts – Likewise, if you have a mortgage (or multiple mortgages) or other debts that your spouse would need to pay in your absence or that would consume a significant portion of your estate that would otherwise go to your children, incorporating a life insurance policy into your estate plan could minimize or eliminate your debts at the time of your death.
- Privately-held business owners – For privately-held business owners, life insurance can potentially serve a few different purposes. These include providing family members with access to the funding needed to keep the business in the family and providing a means to pay federal estate taxes without having to liquidate the company’s assets.
- Married parents who are focused on providing for their children – For married parents who do not have concerns about one another’s financial stability, purchasing a life insurance policy and placing it into an ILIT can provide the dual benefits of probate avoidance and federal estate tax mitigation while ensuring financial stability for their children.
- Individuals who are concerned about asset protection – For many people, asset protection planning is an important component of the estate planning process. Creating an ILIT and timely funding it with an appropriate life insurance policy can provide insulation from creditor claims.
Of course, this list is not exhaustive, and there are various other circumstances under which individuals and couples may benefit from incorporating life insurance into their estate plans as well.
What Are the Benefits of Forming an Irrevocable Life Insurance Trust?
In addition to purchasing life insurance, some individuals and couples will benefit from taking the additional step to form an irrevocable life insurance trust. As its name suggests, creating an ILIT is a permanent decision (although there are still ways to withdraw a policy from an ILIT under some circumstances), and it is one that should be made with a clear understanding of the implications involved.
When you create an ILIT as part of your estate plan, the trust becomes the owner of your life insurance policy. You appoint a “trustee” who will manage the insurance policy’s proceeds after your death, and you appoint “beneficiaries” who will be entitled to distributions from the proceeds according to the terms that you establish. Some of the benefits of establishing an ILIT as opposed to owning a life insurance policy outright are:
- Avoiding estate taxes – If the proceeds of your life insurance place the value of your estate over the federal estate tax threshold (or push it even farther over the threshold), then a significant portion of the value of your policy could be lost to the Internal Revenue Service (IRS).
- Generation-skipping – As discussed above, if your spouse is not likely to need access to your life insurance policy’s proceeds, forming an ILIT can ensure that your children receive the proceeds without triggering potential tax liability at the time of you or your spouse’s death.
- Managing distributions to your children – Forming an ILIT also allows you to establish the terms pursuant to which your children will have access to the proceeds from your policy. Your appointed trustee will administer the trust according to the terms you set, which can provide as much guidance or as much flexibility as you desire.
Do You Have Questions about Estate Planning? Schedule a Consultation Today
If you would like more information about life insurance, ILITs, or any other aspect of developing a comprehensive estate plan, we encourage you to get in touch. To speak with an estate planning lawyer at our offices in Jacksonville, FL, please call us or request a consultation online today.