The estate planning process is meant to help you manage and preserve assets while you're alive and to conserve and control distribution after your death in accordance with your goals and objectives. But estate planning is unique in that it's different for everyone - depending on your life stage, wealth, age, health, lifestyle, and other factors.
For example, a modest estate might require only a simple will, while larger estates concerned with potential estate tax burdens require a more sophisticated strategy such as a trust. But whatever your needs, life insurance can be a valuable element in your estate planning when used in conjunction with the protection of a will or trust to offer the following benefits:
1. Estate tax funding through life insurance
Federal estate tax rates can be a significant percentage of your gross estate and must be paid in cash within nine months of your death. Quite often it's the estate's personal assets that are used to cover tax debt. However, assets such as an IRA or a personal residence are not easily liquidated on short notice without substantial tax penalties. Proceeds from a life policy are typically received income tax-free and could be used by your beneficiaries immediately to fund estate taxes while preserving assets.
Neither Protective Life nor its representatives offer legal or tax advice. Purchasers should consult with their attorney or tax advisor regarding their individual situations before making any tax-related decisions.
2. Preserving family assets
Most family businesses are started with a dream and built with hard work. If what you envision for your business after you die is to keep it in the family, you should first consider a discussion about which of your heirs has the interest in managing and ability to manage the business. In many situations, families can use insurance benefits to “cash out” some of the other heirs if so desired, preserving family peace while continuing viability of the business.
3. Estate equalization
Even if you have an estate plan, it could take a great deal of time before money is released and distributed to your loved ones. Expenses such as funeral costs, business debt, and estate taxes can place financial burdens on your family that could mean delving into their own bank accounts or having to liquidate assets. Funds from your life insurance policy could immediately help pay for these expenses by passing along a tax-free death benefit.
4. Estate plan creation
Life insurance has a unique ability to create an immediate estate for your beneficiaries when you die, often for pennies on the dollar. It allows money to be passed directly to the designated beneficiary, essentially bypassing the complications created by probate. Moreover, the benefits are distributed tax-free and remain untouched by potential debts.
The bottom line
Many people talk about how to use life insurance as part of their estate planning. The bottom line is that having a policy in conjunction with the protection of a will and/or a living trust allows you to guarantee that a lump sum of money will be available upon your death, providing an effective way to transfer wealth to your beneficiaries.
Depending on the complexity of your estate, please consider consulting an estate-planning attorney to be sure the decisions you make are right for you.