1. Pay Estate Taxes

Estate taxes can pose a significant burden on the assets left behind. By incorporating life insurance into an estate plan, individuals can ensure that their beneficiaries have the necessary funds to cover these taxes.

In 2023, estates worth more than $12.92 million ($25.84 million for married couples) were subject to taxation of up to 40%. The tax bill is typically due within nine months of the estate owner’s death, which can create financial strain for heirs inheriting illiquid assets.

Life insurance proceeds can provide immediate liquidity, allowing heirs to address estate taxes without the need to sell assets at potentially below-market valuations.

2. Equalize Inheritance Distributions

In situations where there are multiple heirs and assets that are not easily divisible, life insurance can help equalize inheritance distributions.

A recent article from MassMutual highlights the example of a family business or valuable property that some heirs may wish to sell while others want to retain. By using life insurance, the heirs who wish to sell can be compensated with the death benefit proceeds, ensuring a fair and equitable distribution of assets. This approach helps preserve family harmony and the viability of the business or property.

3. Fund Irrevocable Trusts

Irrevocable trusts are commonly used in estate planning to protect assets and minimize estate taxes. Life insurance can be a powerful tool for funding these trusts.

By naming the trust as the beneficiary of a life insurance policy, the death benefit proceeds can be excluded from the estate, reducing potential estate tax liabilities. This strategy provides immediate liquidity to cover expenses or distributions outlined in the trust, ensuring that the intended beneficiaries receive their designated share.

4. Earmark Funds for Specific Purposes

Life insurance can also be used to earmark funds for specific purposes within an estate plan, like paying off divorce obligations or for child support.

By establishing a trust and designating the life insurance policy as the funding source, individuals can ensure that their financial obligations are met even after their passing. This approach provides a reliable source of funds and financial security for loved ones, alleviating potential financial burdens.

It’s crucial to have open and honest conversations with our clients about the benefits of incorporating life insurance into their estate planning. By understanding their unique circumstances and goals, we can help them make informed decisions that align with their needs. It’s important to emphasize that estate planning is a complex process, and consulting with an estate planning attorney is essential to ensure that the chosen strategies are appropriate and legally sound.

The Takeaways

Life insurance proceeds can provide immediate liquidity, allowing heirs to address estate taxes without the need to sell assets at potentially below-market valuations.

2. By using life insurance, the heirs who wish to sell can be compensated with the death benefit proceeds, ensuring a fair and equitable distribution of assets.
3. By naming an irrevocable trust as the beneficiary of a life insurance policy, the death benefit proceeds can be excluded from the estate, reducing potential estate tax liabilities.

Putting It Into Practice

Life insurance can be a powerful tool in estate planning, providing financial protection and flexibility for our clients and their beneficiaries. By educating ourselves and our clients about the various ways life insurance can be used, we can help them navigate the complexities of estate planning and achieve their goals.