Life insurance is a valuable asset, as it provides an insured’s loved ones with cash in order to cope with the adverse financial consequences of the insured’s death. There are a number of benefits to owning a life insurance policy, some of which may vary depending on an individual’s financial and personal situation. A significant benefit of life insurance for all individuals, regardless of asset level, is the ability to pay expenses upon a loved one’s passing. If an insured names a beneficiary on his or her policy, the beneficiary can put in a claim for the proceeds immediately upon the insured’s passing, and receive the proceeds within weeks. This allows the beneficiary to be reimbursed for burial costs quickly, as well as pay for the cost of administering the estate.
Individuals without significant assets may seek to purchase life insurance in order to replace income for their heirs. This may be the case for parents seeking to replace wealth for young children, or a predeceased spouse seeking to replace wealth for a non-working surviving partner. Naming dependents as the beneficiaries of a life insurance policy provides the beneficiaries with income and wealth if the insured’s passing would leave them financially stricken.
Furthermore, wealthy individuals may seek to purchase life insurance in order for their heirs to conveniently pay federal and/or state estate taxes. Without the benefit of life insurance proceeds, heirs may be forced to liquidate assets or otherwise reduce their inheritance. In New York, a state estate tax is imposed, for the year 2019, on assets in excess of $5,740,000, at a maximum rate of 16%. It is important to understand that the value of the policy is included when calculating one’s asset value, and thus the form of ownership is of paramount importance.
Ownership of a life insurance policy by an Irrevocable Life Insurance Trust (an “ILIT”), can provide tax and other advantages when compared to the policy being owned individually. An ILIT is a lifetime, irrevocable trust set up by the insured individual, that either purchases an insurance policy, or is the recipient of an insurance policy as a gift from the insured. If the ILIT purchases the insurance policy directly, the value of the death benefit is not includable in the insured’s estate assets and therefore will not be used when calculating whether estate taxes are due. If, however, the insured makes a gift of the insurance policy to the ILIT, three years must elapse before the value of the policy is removed from the insured’s taxable estate.
By utilizing an ILIT, upon the insured’s passing, the terms of the trust determine how the proceeds are to be distributed. This is a great estate planning tool in a variety of situations. For example, proceeds can be held in trust for young beneficiaries, or for beneficiaries who otherwise need financial protection as a result of creditor issues or marital problems. In the case of a blended family, using an ILIT allows an insured’s spouse to be named the beneficiary for his or her lifetime, but ultimately distribute the balance of the death benefit to the insured’s descendants.
Overall, insurance is a valuable asset for a number of reasons, especially when looking to develop one’s estate plan. Insurance policies are also flexible in the sense that the death benefit can be changed and the premiums adjusted, to adapt to a change in lifestyle. With recent changes in the world of estate planning, both clients and advisors should be emphasizing a renewed importance and focus on the ownership of life insurance. Contact Katz Chwat, P.C., to discuss the benefits of life insurance policies and the use of ILITs to own them.
Posted in: Estate Planning