When to Use Life Insurance in Estate Planning

Many of our clients have been watching the recent estate tax changes and wondering if they should continue to hold on to their life insurance. Others are asking if they should be purchasing life insurance. This article is not so much about different types of life insurance or an analysis of life insurance companies, but rather is a look at situations where life insurance can provide value to you and your family.

1. Estate Tax

The recent change in federal tax law raising the estate tax exemption to $5.24M means that fewer people will be subject to federal estate tax. However, for those who will be subject to this tax, life insurance remains one of the best ways to provide for payment of the tax.

Not every state has an estate tax, but several do. If you own property in a state that has such a tax or if you are thinking about moving to such a state, you will want to calculate the approximate tax due. Once done, you may want to consider life insurance for purposes of paying the state estate taxes.

Life insurance can create liquidity and avoid untimely liquidation of valuable family assets such as a business, art, and real estate and investment holdings.

2. Liquidity – Inheritance Balancing

Many clients own assets that are not readily susceptible to equal division among children or grandchildren. Examples include businesses, real estate, art, and collections where it might be better if not divided among family members. In such cases, life insurance can be used to equalize an inheritance allowing a business owner or collector to pass the business or collection to the child that is running the business or interested in the collection and using the life insurance proceeds to equalize the family inheritance to other children.

3. College Education

Life insurance can be helpful in the case of a breadwinner who dies while his or her children are still young. Proceeds can be made available for college, private school or trade schools.

Of course, insurance can also be employed to provide education for grandchildren in the case of the death of a family patriarch or matriarch. People have also used a life insurance funded trust to provide a pool of education money for many generations to come.

4. Vacation Home Maintenance

Many clients own second homes and want to pass those homes on to their children to enjoy. Unfortunately, home ownership has expenses associated with it and not all children have the wherewithal to fund those expenses. Here is another case where life insurance on the senior family members can be used to provide a fund that can perpetually maintain the family vacation home.

5. Special Needs Children

One area where life insurance can be extremely powerful is with regard to trusts funded with life insurance for special needs children. Such a fund may be set up to allow life insurance proceeds to be a supplemental benefit in addition to any state or federally provided benefits. This type of funding can make the difference between subsistence living and a better quality lifestyle. Keep in mind that this area of the law is currently in flux and so be sure to check with us prior to establishing such a trust to make sure it will work as anticipated.

Life insurance is certainly not the answer to all estate planning issues, but should be considered if it can be used to help you to accomplish your planning goals.

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