Introduction
Estate planning often is not just as simple as having your family attorney draft you a will. It is becoming increasingly more complex and requires an attorney with experience in this area of the law. Even if you do not have a large estate, through the careful use of life insurance and other insurance policies, it is possible to leave a sizable estate behind at the time of your death. Life insurance policies can create an "instant estate" and should be given full consideration by the attorney you choose to do your estate planning. Before you begin estate planning, it is important to consult with an attorney who is experienced in both estate planning and insurance matters. Such an attorney can help you maximize your estate so, all other things being equal, you can leave the largest possible after tax inheritance to your beneficiaries while maintaining your desired standard of living during your lifetime.
The Marriage of Insurance and Estate Planning
One of the very best things you can do for your family and loved ones is to plan for their financial security upon your death, especially an untimely and unexpected death. Estate planning is not just for the rich, but is a topic that should be visited by every responsible adult in this country. One of the common misconceptions about estate planning is that it can only be done when an individual has amassed a large number of assets. This is a false belief because, through insurance planning, a deceased person can acquire an "instant estate."
There are many types of insurance policies that a person purchases in his or her lifetime. Perhaps the most common insurance policy is a life insurance policy. A life insurance policy is purchased to insure against loss upon the insured person's death. The proceeds of a life insurance policy are paid upon the insured's death to a designated beneficiary (usually the insured's spouse or children, or frequently to a trust). Because the insurance industry is securely established and influential in this country, most states have statutes excluding life insurance proceeds from administration by the probate court. Therefore, although creditors may seek to satisfy their claims from the assets of an estate, normally, insurance proceeds are free from the reach of creditors.
When obtaining life insurance, there are many different varieties to select from. First, there is "whole-life insurance," which provides coverage during the entire life span of the insured and is payable at the time of the insured's death. "Whole-life insurance" also has varying premium payment options. There is "straight" or "ordinary" life insurance, wherein the premium payments are paid throughout the entire life of an insured or until the insured reaches a pre-set, advanced age. In addition, there is "limited-payment" life insurance, where premiums are payable for a set number of years, or, until the occurrence of a specified event. Under this option, the premiums are more costly than "straight" insurance; however, at the end of the payment period or the happening of the specified event, the policy can be "paid up", or the premiums may vanish. As an alternative, the death benefit can continue to increase to reflect increasing policy values. Another option for "whole-life" policies is to select a "single-premium" policy, where the insured pays only one payment for the policy. One benefit of "whole-life" policies is that they generally have a "cash surrender" value, and, if the policyholder decides to terminate the policy, he can surrender the policy and receive its cash surrender value. The holder of a "whole-life" policy may also pledge the policy as security for a loan.
While "whole-life" insurance includes a forced savings feature, "term" or "pure" life insurance does not have a savings feature and does not have a cash surrender value. Under "term" life insurance, the policy exists only for a stated term. If the insured dies during the term of the policy, insurance proceeds will be paid to the beneficiary. Once the term has ended, however, there is no longer any insurance in force, and, if the former policyholder dies after the term has ended, there will be no payout from the policy.
Whatever the exact nature of the policy, if the insured dies during the effective period of the policy, the proceeds of that policy are payable to his or her designated beneficiary. It is wise to know that there are means to control how payment is made upon the insured's death. That is, just because you have acquired a policy with payable proceeds of $400,000, your beneficiary does not have to receive the $400,000 all at one time, as a "lump sum" payment. Instead, life insurance proceeds can be placed in a trust, wherein the trustee can payout proceeds at regular intervals or can make payments to designated beneficiaries on an "as needed" basis. An insured can also select "settlement options," which allow the insurer to make proceed payments in a flexible manner, as directed by the insured. Placing proceeds in a trust, however, is usually more desirable than utilizing settlement options, as a trustee will often have more investment power and general discretion than the insurer.
One final attraction of estate planning with life insurance is that the proceeds of a life insurance policy can pass to the stated beneficiaries free from the Federal Estate Tax as long as the insured does not retain any "incidents of ownership" at the time of his or her death. Incidents of ownership include the following:
- The right to change the beneficiary of the policy;
- The right to turn in the policy for a cash payout;
- The right to use the policy as security for a loan; and,
- The right to designate methods of payment under a settlement option.
By the use of proper trust planning, these powers can be held by a trustee, thus avoiding adverse tax consequences. A qualified estate planning attorney can assist you in avoiding having the proceeds of your life insurance policy taxed under the Federal Estate Tax.
Conclusion
Although we have found that some of the greatest benefits of estate and tax planning using life insurance can be obtained by affluent individuals, you do not have to be a wealthy, or even elderly, individual to benefit. In fact, if you are young and fairly asset poor, you may need to carefully consider your estate-planning options even more so than a high net worth, older person. This is especially true if you have a family relying on your income. Planning now for the unhappy event of an untimely death is a gift of love, a gift that can outlive you. Your family's financial needs can be provided for through carefully planned insurance policies. Higher net worth individuals can see considerable tax advantages and can leave an even larger inheritance to their loved ones. An experienced estate-planning attorney can help you make wise decisions that will create funds for your family if you unexpectedly die, whatever your financial circumstances.
Our Experience with Estate Planning with Insurance
The Law Offices of Robin S. Gnatowsky concentrates in the areas of estate and personal financial planning. Mr. Gnatowsky is both a Certified Public Accountant and a Certified Financial Planner specializing in family wealth management. He also holds a Chartered Life Underwriter (CLU) designation from the American College of Life Underwriters and as an estate planning attorney has worked with numerous individuals and families over more than a decade in the proper incorporation of life insurance into the client estate planning process.