September 28, 2023 •HoganTaylor
Have you worked hard to achieve financial success and want to leave a lasting legacy for future generations? If so, life insurance can be a powerful estate planning tool, even if your estate is not taxable.
Traditionally, life insurance has been used to cover estate taxes and related expenses. But even now that the federal gift and estate tax exemption is so high, life insurance can still be very useful for estate planning.
Here are a few ways that life insurance can be used to benefit nontaxable estates:
Replacing income and wealth:
One of the primary roles of life insurance is to replace your income if you die prematurely. This can help to ensure that your family's financial needs are met even if you're not there to provide for them.
Life insurance can also be used to replace wealth in a variety of situations. For example, if you own highly appreciated real estate or other assets, you may want to sell them but are concerned about paying capital gains taxes. However, you could use a tax-advantaged strategy such as a charitable remainder trust (CRT) to reduce or eliminate the potential tax burden.
A CRT is an irrevocable trust that allows you to donate assets to charity during your lifetime or upon your death. In return, you or your designated beneficiary receive income payments from the trust for a specified period of time. After the trust term ends, the remaining assets are donated to the charity of your choice.
Because the CRT assets will eventually go to charity, you could use a life insurance policy to replace the value of the appreciated assets that are going to charity in a tax efficient manner.
Treating your children equally:
If you have children who are not involved in your family business, you may want to use life insurance to ensure that they receive an equal inheritance. This is because the value of the family business may be much higher than the value of your other assets.
By purchasing a life insurance policy, you can provide your non-active children with additional financial support so that they inherit the same amount as their siblings.
Protecting your assets:
In some states, the cash surrender value and death benefit of a life insurance policy are protected from creditors' claims. This can be a valuable feature, especially if you are concerned about debt or lawsuits.
To further protect your assets, you can establish an irrevocable life insurance trust to hold your policy. This type of trust is generally not subject to your creditors' claims in most states.
Conclusion:
Life insurance is a versatile and valuable estate planning tool for nontaxable estates. It can be used to replace income and wealth, treat your children equally, and protect your assets.
If you are considering using life insurance in your estate plan, it is important to consult with an experienced estate planning professional to discuss your specific needs and goals.
HoganTaylor Estate Planning Services
HoganTaylor estate planning professionals leverage their tax and business advisory expertise to help individuals accomplish goals and minimize tax burden. If you have any questions about the content of this publication, or if you would like more information about HoganTaylor's Estate Planning services, please contact Dan Bomhoff, Estate Planning Lead.
INFORMATIONAL PURPOSE ONLY. This content is for informational purposes only. This content does not constitute professional advice and should not be relied upon by you or any third party, including to operate or promote your business, secure financing or capital in any form, obtain any regulatory or governmental approvals, or otherwise be used in connection with procuring services or other benefits from any entity. Before making any decision or taking any action, you should consult with professional advisors.
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