Too many Americans aren’t aware of the importance of estate planning in protecting their assets. Without an estate plan, your assets could be dispensed to unintended parties during the probate process. Once an individual understands the importance of having an estate plan in place, the next step is to identify the vital elements of a good estate plan. And one of the most important elements of any good estate plan is life insurance.
Do You Know the Important of Life Insurance in Estate Planning?
Many turn to estate planning in an attempt to spare their surviving family members chaos and conflict that can occur when a loved one passes away. In fact, this is one of the most common reasons to create an estate plan. Another reason many cite for putting their estate plan in place is to protect their heirs from the finance mismanagement that could squander their inheritance or to protect their children’s, grandchildren’s, etc. inheritance from creditors. The net estate is calculated by considering your assets minus your debts. Any life insurance policies that include “incidents of ownership” can be included in the taxable estate. Improper life ownership of life insurance can increase the size of the estate as well as the amount of estate taxes that will be assessed against the estate.
Many could benefit from considering an irrevocable life insurance trust. This allows you to control your insurance policies and the money that is paid from them. It can also reduce or even eliminate the applicable estate taxes. This leaves more of your estate passing along to your heirs according to your wishes. The irrevocable life insurance trust owns the insurance policies. This removes them from inclusion in the estate – effectively reducing any existing estate taxes.
The Irrevocable Life Insurance Trust Can be Divided Into 3 Parts:
- The Insured or Grantor – the person creating the trust.
- The Trustee – the person the grantor names to manage the trust.
- Trust Beneficiaries – Recipients of trust assets after the grantor dies.
In most cases, the trustee purchases a life insurance policy with you as the insured and the trust listed as the owner and/or beneficiary. When the insurance policy benefit is paid after death, the trustee that was appointed for the trust collects the funds and makes them available to pay estate taxes and other expenses that could include items such as legal fees, probate costs, income taxes, debts, etc.) and then follows the grantor’s instructions in distributing the funds to trust beneficiaries.
The grantor of the life insurance trust can make tax-free gifts to each trust beneficiary for up to $13,000 annually. The grantor’s spouse can also gift up to $13,000 annually bringing the potential tax-free gift amount to $26,000 each year. The grantor “gifts” the trustee who then notifies the trust beneficiaries of the gift. The beneficiaries can access these “gifts” at the time or the trustee can use these gifts to cover life insurance premiums.
If you have questions about estate planning tools that can protect your wealth or how to manage your life insurance in connection with your estate plan, please get in touch with one of the experienced California estate planning attorneys at The Law Office of Janet L. Brewer.