Doctor Filling out a Form and Working on a laptop


Gregory S. DuPont Jan. 11, 2019

Are you hoping the business you’ve worked so hard to build will live on for the benefit of your family once you’re gone? So was Angelo (a hypothetical case), the founder of a thriving $3 million car dealership. His dream was to pass the company on to his son, Matthew. But Angelo, a widower, had never found the time to plan his estate. After Angelo’s death, his estate faced a significant estate tax liability.

To keep the business in the family, nearly every asset in Angelo’s estate, with the exception of the business, was liquidated to raise the cash needed to help pay estate taxes. After almost losing the family business to estate taxes, Angelo’s son, Matthew, vowed not to put his family through a similar ordeal. Matthew has found a unique and economical strategy to help ensure that his estate has sufficient cash to handle his future estate tax liability. It’s called survivorship life insurance.

Also called “last-to-die” or “second-to-die,” survivorship life insurance covers the lives of two individuals, but pays only one death benefit upon the death of the second insured. It often costs less than a single policy on either insured because the insurance risk is spread over two lives, rather than one. An individual may even qualify for survivorship life insurance if he or she is otherwise considered medically uninsurable. For these reasons, survivorship life insurance may offer individuals like Matthew, and his wife Ava, a viable means to help cover their estate tax liability.

First Things First
As part of their estate conservation strategies, Matthew and Ava may want to first minimize the size of their combined taxable estate. Suppose their estate is currently valued at $12,000,000. With the appropriate trusts and proper asset ownership, Matthew and Ava can each transfer $5,430,000 (in 2015) to their heirs free of estate taxes. If this initial step is taken, their combined taxable estate is reduced to $1,140,000 ($12,000,000 – $10,860,000). However, under current law, with a top estate tax rate of 40%, their heirs may still face a significant estate tax bill. In addition, this liability may increase over time, as the business and their other assets appreciate.

Enter Survivorship Life
Here’s where survivorship life insurance enters the picture. The next step for Matthew and Ava is to create an irrevocable life insurance trust (ILIT) that purchases a survivorship life insurance policy in an amount equal to the anticipated estate tax liability. The ILIT is the owner and beneficiary of the policy, and the trust is written for the benefit of Matthew and Ava’s heirs. Because the trust is “irrevocable,” it remains outside of their estate. Therefore, the policy’s proceeds are not subject to estate taxation. Policy premiums are paid through tax-free gifts that Matthew and Ava make to the trust using the annual gift tax exclusion ($14,000 per year, per donee or $28,000 for gifts made by both husband and wife in 2015). When the surviving spouse dies, the death benefit proceeds are available to Matthew and Ava’s heirs to help pay estate taxes.

Mission Accomplished!
By using survivorship life insurance, in conjunction with the appropriate legal documents, Matthew and Ava are able to fund their potential estate tax liability. By addressing the issue of estate taxation now, Matthew and Ava have taken an important step toward preserving the future of their family business.