Life insurance can play a valuable role in estate planning, from providing cash to the trustee or executor to pay off debts and final expenses, to providing funds to pay off a mortgage or provide for college, or to replace an income for a surviving spouse and children. Sometimes it is even used to infuse cash into a business upon the untimely death of a partner, or in larger estates, to provide the liquidity needed settle up any estate tax liability without having to sell off any of estate’s assets.

However, when it comes to taxes, it is important to remember that with estate planning, we are often talking about two different kinds of taxes: income taxes and estate taxes. Life insurance is normally income-tax free to the beneficiary. (There are a few exceptions, particularly if the policy is used in business partnerships).

The key to remember is that while life insurance in most instances is income-tax free, it is still taxed under the federal estate tax rules, because the federal estate tax is a tax on the transfer of property. This transfer tax is assessed on the assets you leave to the next generation. Because of this, the proceeds of all the life insurance that you own or control is included in your taxable estate for purposes of calculating your estate taxes, even if the proceeds did not come into your estate.

There are, however, estate planning tools that can address the issue, such as an ILIT, an Irrevocable Life Insurance Trust, that may be used if an estate is facing a tax burden. Work with an estate planning attorney to determine the best tools to meet your specific needs, whether it is determining the role of life insurance in your estate, drafting a will or creating a trust.

The Hammond Law Group is a member of the American Academy of Estate Planning Attorneys.

Whether you are single, have children, own a home, are sending a child to college or retired — you buy insurance for peace of mind. It is a safety net for you and your loved ones, but life insurance is not only a safety net, it plays an important role in estate planning, and it is important to choose a policy that meets your specific needs. While an estate planning attorney can help you put together a comprehensive estate plan to include life insurance, it helps to know the basics so you can make an informed decision.

The simplest type is life insurance policy is term life. It provides coverage for a specific period of time, the term, which can be one year or more. For the lowest initial cost, annual renewable term life insurance usually fits the bill. Premiums are particularly low for young people, but they increase each year as you grow older. Level term life insurance policies, on the other hand, offer premiums that are guaranteed not to increase for a set period of time, such as 10, 20 or 30 years.

When is a life insurance policy not just a life insurance policy? When it also offers a method for savings, such as permanent life insurance. This type of life insurance is intended to remain in force for your entire life. Policies offer insurance coverage as well as the potential to accumulate cash value.

As you might expect, permanent life insurance premiums are more expensive than term premiums because some of the money is put into a savings program. The longer the policy has been in force, the higher the cash value, since more money has been paid in and the cash value has earned interest, dividends or both. If you buy a policy today, your first annual premium is likely to be much higher for a permanent life policy than for term.

The premiums for permanent life insurance policies normally stay the same over the years. That extra premium paid in the early years of the permanent policy gets invested and grows, minus the amount your agent takes as a sales commission. The gain is tax-deferred if the policy is cashed in during your life. When you die, the proceeds are usually tax-free to your beneficiary, but are normally included in the value of your estate.

Life insurance plays a critical role in estate planning, and it is important to have the policy coordinated to the other elements within your estate plan. An estate planning attorney can work with you to build a comprehensive estate plan that meets the specific needs of your family.

The Hammond Law Group is a member of the American Academy of Estate Planning Attorneys.

Life insurance is a powerful estate planning tool. There are several roles it can play in easing the burden of your passing on your loved ones. While many consider life insurance to simply be an income replacement when a loved one passes, there are other ways it fits into an estate plan:

1. To pay expenses while an estate is in probate.

Since life insurance pays benefits to a named beneficiary, it avoids probate, and therefore the funds can be accessed more quickly than property that must be probated. Probate is the legal process that ‘settles’ an estate, and it can tie up property for months, but life insurance proceeds pass outside of this process.

2. To pay funeral costs, debt and estate administration costs.

Life insurance policies can be used to pay the costs of funerals, as well as probate fees and other debt of the deceased when an estate may have assets that are not liquid, such as real estate.

3. To create a life insurance trust.

An ILIT is an irrevocable life insurance trust, and it can be a powerful estate planning tool. An ILIT is a holding device that owns your life insurance policy for you, removing it from your estate. As its name suggests, the ILIT is irrevocable, which means once you have created this trust and funded it with an insurance policy, you may not take the policy back in your own name. But you can closely control many other aspects, such as naming the beneficiaries, the terms of the payment of benefits as well as choosing the trustee to manage the trust.

While a life insurance policy can have many advantages within an estate plan, it is important to work with an estate planning attorney to ensure that it properly coordinates to other aspects of your plan.

The Hammond Law Group is a member of the American Academy of Estate Planning Attorneys.

An Irrevocable Life Insurance Trust is an irrevocable trust that holds life insurance, and as an irrevocable trust it keeps the proceeds of the policy out of the estate of the grantor. First, let’s review the purpose of a trust, which is an estate planning tool that sets up an entity to hold and manage property or assets. The person setting up a trust is known as a grantor or settlor, the person managing the trust is called a trustee, while the person(s) benefitting from the trust is known as the beneficiary.

With a life insurance trust, the trust is set up specifically to hold and manage the life insurance policy. Normally, when an insured owns a life insurance policy, the proceeds of the policy will be subject to estate tax when he dies; but if the owner of the policy transfers ownership to an irrevocable life insurance trust that follows specific guidelines, the proceeds are free of the estate tax.

There are limitations to an irrevocable life insurance trust, such as:

• An insured person may not serve as the trustee of a life insurance trust;
• A beneficiary may not be changed on the policy;
• The insured may not borrow against the policy. If the trust allows him to borrow against the policy, he will be deemed as benefiting from the policy, and thus the owner of the policy, which then subjects it to estate tax and defeats the purpose of the trust; and
• Once you set up and fund the trust, you cannot get the policy back. If you become uninsurable, you will be committed to this trust as your only life insurance.

While there are several drawbacks, there are also several estate planning benefits, such as:

• A properly structured irrevocable life insurance trust provides liquidity. In an estate that holds an abundance of non-liquid assets, such as real estate, a Life Insurance Trust can help pay a large estate tax bill without selling off assets;
• Beneficiaries may be protected from future creditors by including a spendthrift provision in the trust document and granting discretion to the trustee in making distributions; and
• Premiums on the policy can be paid with gifts to the life insurance trust from the insured and, if the trust is properly drafted, the gifts may qualify for the IRS exclusion from gift tax liability.

Trusts are a powerful estate planning tool, and an estate planning lawyer can help you determine if an irrevocable life insurance trust meets your needs.

The Hammond Law Group is a member of the American Academy of Estate Planning Attorneys.

Sure, there’s 101 other things you could be spending your money on, but life insurance may need to be at the top of your list. Want to know why?

You Can’t Predict the Future

Do you have a magic ball that lets you see what surprises might be waiting around the corner? Probably not. Every day someone dies and while we don’t want to believe it could happen to us, the fact is that it could. I regularly meet with families grieving the loss of a loved one who was young and vibrant. Tomorrow it could be you, no matter what your age. Since you can’t predict the future, it’s important to get a life insurance policy started as soon as possible.

Lower Premiums Today

The younger you are when you purchase a life insurance policy, the lower your premiums will be and the better likelihood you will have of being accepted by an insurance company. Premiums are low for those who are in good health and practice healthy living such as not smoking and limiting alcohol.

Quick Money after Your Death

When you pass away, your estate may have to endure probate, a lengthy court process to validate your Last Will and Testament and pass your belongings to your heirs. This process can last months or even years. So, what will your family do in the meantime to cover your funeral expenses and pay off any last debts you have? A life insurance policy allows your beneficiaries quick access to money to cover estate bills while other assets are tied up in court.

Long Term Income for Your Family

Life insurance can offer your loved ones an alternative source of income when you pass away. If you have no life insurance and your pay makes up a portion or all of your family’s income, your family may experience a drastic change in lifestyle after your death. Even the loss of a stay-at-home parent has a drastic financial impact on a family, as the surviving parent may have new child care expenses he or she didn’t previously have to worry about. To ensure your family doesn’t suffer financial hardship after you are gone, you should get a policy started quickly.

Allow Your Children to Go to College

If you should pass away before your children reach the age of eighteen or while they are still in college, they may not have a way to pay for school if they were reliant on your income. A life insurance policy can provide money for your children’s higher education.

How does life insurance fit into your estate plan?

Estate planning isn’t just about distributing your assets after you’re gone – it’s also about protecting your family and helping you reach your financial goals. Call us today to learn more about what a complete estate plan could do for you.

The Hammond Law Group is a member of the American Academy of Estate Planning Attorneys.