Using life insurance as an estate planning tool to maximize wealth, minimize taxes, and leave a lasting impact
Estate planning can seem daunting. Many people think of an “estate” as something belonging to only the very wealthy. But if you own assets, you have an estate and should consider planning how it will be handled either at your death or inability to handle it on your own. Estate planning means creating a plan for who will receive your assets and how that transfer will be accomplished. And while estate planning involves finances, taxes, and legal documents, it also involves complex family dynamics and planning for the legacy you wish to leave behind.
Gifting with power
How do you create a lasting legacy that will benefit your loved ones in the future? While the answer to that question will depend on the specific legacy you want to create, one common planning technique that often can solve many wealth transfer goals involves making lifetime gifts to an irrevocable life insurance trust (ILIT) and leveraging those gifts as the premium for a life insurance policy.
Making gifts directly to the recipient allows you to see their use and enjoyment. But what if they could leverage that gift into something more significant? That is where a life insurance trust comes in. By creating an ILIT and funding it with the gifts previously described, the trustee can use them to pay the premium on a life insurance policy that will pay out upon the death(s) of the insured(s).
Estate planning and taxes
Creating an efficient plan often means considering the impact taxes might have on legacy assets. Most people want to minimize taxes and maximize the amount left to heirs. Your planning team can help you address this. There are some tools you can use within your estate plan, including ways to avoid probate and pass assets while avoiding hefty taxes. Common tax planning techniques include charitable giving ideas, using various tax exemptions, and creating trusts designed to achieve specific results.
Life insurance can also play a role in tax and legacy planning, providing a much needed source of liquidity to pay taxes and other transfer costs without having to liquidate your assets in your estate. It is a common tool used in estate planning due to its versatility in addressing different needs. Depending on the needs and the size of the estate, the policies can either be owned individually or in an ILIT. Your estate planning team should include a knowledgeable insurance planning professional to help make the decisions about when and how life insurance should be included in your planning needs.
A winning combination
Making gifts into an ILIT to purchase life insurance can make sense for many people looking to create a liquid legacy for their families. The gifts reduce the overall taxable estate, and the death benefit can create a larger inheritance for the heirs. The trust can be structured to mirror what the grantor feels is most important and enable the beneficiaries to meet their lifetime goals. Whether the proceeds are distributed to the beneficiaries once paid to the trust or held for many generations to come, this planning idea is a simple, effective way to pass assets tax-efficiently.
Plan for tomorrow
Taking the steps to create a plan that accomplishes your goals will result in your legacy plan being carried out with efficiency and accuracy. Take the first step and contact your financial planning team today. The only way to truly accomplish your goals is to plan for them!