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Financial planning for estate planning


Estate Planning with Life Insurance

What is an Estate Plan?

Many people mistakenly think that estate planning only involves the writing of a will. But estate planning involves a great deal more than that, as it can include such aspects as financial, tax, business, and even medical planning. So, while writing a will is certainly a big part of the overall process, there are many other documents that are also necessary to fully address all of your estate planning needs.

An estate plan can help you to clarify your intentions both during life and after death. For instance, should you become incapacitated due to an illness or accident, you can pre-state your intentions regarding medical treatment.

Additionally, death can take a tremendous toll on a family. In addition to the emotional turmoil, survivors must deal with a number of financial and tax-related issues. Having an estate plan already in place, however, can provide the steps that your survivors will need to move forward – alleviating a great deal of stress, strain, and emotion.

The Importance of Life Insurance in Estate Planning

The proceeds of a life insurance policy can do much more than provide a large sum to your beneficiaries.

Here is just a partial list of the benefits provided by making life insurance a part of your estate planning strategy:

  1. It provides immediate cash at death to pay funeral expenses, debts and final income taxes of the insured.
  2. The cash provided by the proceeds can be made available to pay estate taxes and, thus, avoid the forced sale of an asset.
  3. Generally, life insurance proceeds payable to a named beneficiary pass to that beneficiary free of income tax.
  4. Proceeds from the policy provide a relatively low-cost source of funds that can be transferred to a trust created in the insured’s will for the benefit of, for example, minor children or elderly or handicapped relatives.
  5. Life insurance proceeds payable to someone other than the insured’s estate can avoid passing through probate when the policy is owned by an irrevocable insurance trust. For example, the funds may be used to satisfy marital settlement obligations for child or spousal support.
  6. When the insured owns a closely held business, life insurance proceeds may fund a buy-out of his or her interest.

How life insurance in an irrevocable trust works

The first step is to establish an irrevocable trust, which will serve as the owner and beneficiary of a life insurance policy insuring your life. As grantor of the irrevocable trust, you name another party or parties to serve as trustee.

Once established, the trustee can use trust assets to pay life insurance premiums.

In addition to life insurance, an irrevocable trust can own almost any kind of asset: cash, stocks, bonds, mutual funds and real estate.

It is important to remember that it is irrevocable, and you will typically be unable to change its terms without legal proceedings once it has been established.

Additionally, the assets that you transfer to the irrevocable trust are no longer your assets. The trustee will manage the trust assets, and the individuals who have been named as beneficiaries will receive those assets pursuant to the terms of the trust. Assets, including the insurance policy on your life, are no longer your own, any benefits received  by you from the trust could nullify the purpose of the trust and bring the life insurance death benefits into your taxable estate.

How can insurance be used to facilitate a business succession plan?

When transferring a family or closely-held business, there’s a possibility that not all of the children will be interested in or suited to take ownership of the business. In fact, it’s possible that none of the children will want anything to do with it.

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.

For businesses that have significant cash flow needs, or for clients with substantial real estate holdings that function as a business, a life insurance policy can guarantee liquidity to cover maintenance expenses–a worry no one wishes on grieving loved ones.

If you have loved ones you want to make sure are well taken care of, it’s important that you take every possible measure to maximize the real value of the wealth you have created. Perhaps you even wish to assure the welfare of generations of your family into the distant future. Life insurance, properly structured within various trust instruments, can help you achieve those important goals. Or maybe you want to address a special family.

Wise people have visions, and they write their own destiny.

Plan your estate, today...