How Life Insurance Fits into your Estate Plan
Even with reduced estate tax rates and higher exclusion levels, Americans could still be on the hook for billions of dollars in estate taxes over the coming years. More than half a million estate tax returns were projected to be filed with the IRS in calendar years 2004 to 2010.
Fortunately, there are strategies to help protect the legacy you intend to leave your heirs. One popular method uses life insurance to complement your estate plan and possible help offset your estate tax liability.
Set Up a Life Insurance Trust
The death benefit from a life insurance policy is not subject to federal income taxes. But if you are the policy owner and the death benefit is large enough to push the value of your estate over the applicable exemption amount ($1.5 million in 2004 and 2005), some of your estate could be taxed (maximum 47 percent rate in 2005).
If you set up a properly structured irrevocable life insurance trust to purchase your life insurance policy and pay the premiums, the death benefit will be paid to the trust and will not be considered part of your estate. You can fund the trust with “present interest gifts” of cash each year. The trustee appointed when the trust is drafted can use the cash to pay the policy premiums, and eventually will distribute any proceeds according to the terms of the trust.
The proceeds from a policy held in an irrevocable life insurance trust may also help protect your heirs from being forced to raise cash to pay any other taxes that your estate might incur.This may prevent them from having to sell assets such as a home or business.
But be careful. An irrevocable trust cannot be changed after you finalize the terms of the trust.
Setting up an irrevocable life insurance trust to hold your life insurance policies could help protect your heirs from having to pay estate taxes on your legacy. That’s one good reason to carefully consider the role of life insurance in your estate plan.
1) Internal Revenue Service, 2003
2) The cost and availability of life insurance depend on such factors as age, health, and the type and amount of insurance purchased. Before implementing a strategy involving life insurance, it would be prudent to make sure that you are insurable by having the policy approved.
3) The use of these approaches can involve a complex web of tax rules and regulations. You should consider the counsel of an experienced estate planning professional before implementing such strategies.
Meredith C. Moore is a Registered Representative offering securities through NYLIFE Securities Inc., Member NASD/SIPC. (404) 459- 2000. Financial Advisor offering investment Advisory services through Eagle Strategies Corp., A registered Investment Advisor. Moore and Associates Wealth Management is not owned or operated by NYLIFE Securities Inc. or its affiliates.