Gregory S. DuPont
Life Insurance - A Diverse Estate Planning Tool
2020 was certainly a transformational year. There is no doubt that 2021 will be a little different also. One thing on many people's minds is how to best prepare for the unexpected. When creating or reviewing an estate plan, one thing people are encouraged to consider is the inclusion of a life insurance policy.
A life insurance policy can be a diverse tool. It can be a source of replacement income for your family in the event of your death. The death benefit may also be used to help pay estate taxes or other immediate financial obligations.
Just as there different types of estate planning, there are several types of life insurance policies. An irrevocable life insurance trust (ILIT) is a tool often recommended to clients. Let’s take a closer look at some of its typical uses.
Generally speaking, the amount of estate planning necessary is dictated by the size of your assets. For instance, if you are married, a properly drafted and executed will and inter vivos (living trust) for you and your spouse, coupled with appropriate asset ownership, will only ensure that, in 2015, the first $10,860,000 of your estate will get passed on to your heirs free of estate taxes.
Thus, for estates over $10,860,000 for married couples and $5,430,000 for single individuals, any amount in excess will be subject to estate taxes. If you wish to pass on your estate to your heirs in full, the ILIT becomes a useful tool to help curb any encroachment on your estate and fund the payment of estate taxes due.
When properly implemented, the proceeds of an ILIT will not be included in your estate. They will be payable to the ILIT’s beneficiaries (generally, children and grandchildren) without incurring any estate tax consequences.
What Is The Purpose Of An Irrevocable Life Insurance Trust?
What an ILIT does is purchase a life insurance policy on your (the donor’s) life. The policy premiums are funded by annual gifts you make to the ILIT. As a result, you could use your annual gift tax exclusion (in 2015, $14,000 annually per donee and $28,000 for gifts made by husband and wife) to fund the ILIT.
In more advanced uses, an ILIT can be strategically employed to help ensure continuity in a closely-held business. For instance, handing down a family-owned business of substantial value to heirs may be hampered by potentially large estate taxes. In some cases, in order to raise the necessary cash to pay for these taxes, the business might be forced to sell. To avoid this from happening, an ILIT may be used to purchase a life insurance policy on the owner so the death benefit can provide the cash needed to help meet estate tax obligations.
Estate planning is an ongoing process that requires a personal commitment in order to make sure the end result is just the way you want it. Although an ILIT can be an integral part of your overall plan, it is important to understand that the most cost-effective estate plans are usually a result of close teamwork between you and your insurance, legal, and tax professionals.
If you need help with your estate planning or have questions about life insurance, our team of experts are ready to speak to you. Call DuPont and Blumenstiel, Estate Attorneys, Columbus, Ohio on (614) 389-9711.