Top 10 Uses of Life Insurance at Non-Taxable Estates

Even though there’s a current lapse at the property and generation-skipping move taxation, it is very likely that Congress will reinstate both taxations (maybe even retroactively) a while throughout 2010. But, it’s the writer’s view that the estate tax exemption is going to be $3.5 million after Congress acts.

Uses of Life Insurance

Estate planners typically utilize life insurance as a way of paying real estate taxes. Thus, for many decedents, the federal estate tax was repealed. But for the reasons explained below, life insurance may nevertheless play a substantial part within a non-taxable estate.

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1. Capital Requires.

Life insurance has long been utilized to safeguard young families from the devastating effects of a breadwinner’s premature death medical malpractice. It’s the only means to ensure that the possible shortfall in a household’s funding needs will be dealt with in case of a premature departure.

2. Wealth Replacement.

Charitable remainder trusts are frequently used by men and women who would like to sell highly appreciated resources without creating any capital-gains tax obligation. A life insurance coverage can be bought for the benefit of the donor’s heirs to”substitute” the riches passing to charity.

3. Estate Equalization.

Most parents wish to take care of their children equally when dividing their estate. However, this could prove impossible with family companies where only the kids active in the companies are to obtain the companies. If the company’s worth exceeds the busy kids’ share of their estate, it’s not possible to deal with the kids alike. A very simple solution would be to use a life insurance coverage as a real estate equalizer. The non-active kids (or a trust for their benefit) are the beneficiaries of this policy.

4. Creditor Protection.

The money value of a life insurance coverage or the death proceeds from a coverage might be protected from lenders based upon state law. The sum protected varies from state to state, and could be determined upon who will be the beneficiaries of this policy. By way of instance, some states just shield a policy’s cash value and death proceeds in the event the insured’s spouse or kids are the beneficiaries of this policy.

5. Second Marriages.

When kids from an earlier union are concerned, estate planning gets more complex. Just take the instance of another union where the husband has kids from a former marriage. The husband builds a living trust which, upon his passing, provides his spouse with earnings and principal as necessary to keep her accustomed standard of living, together with the remainder passing to his kids at his spouse’s subsequent departure. To begin with, the kids must wait until their stepmother’s departure to inherit their father’s wealth.

Secondly, since the remainder beneficiaries of the trust, the kids have legal rights to challenge both the distributions from the trust for their stepmother if these distributions exceed (from the children’s view ) the sum called for by the trust. A solution to such issues is a life insurance to the husband’s lifestyle. The coverage beneficiaries can be the spouse or the kids. Alternately, if the kids are the beneficiaries, then the husband could leave his property to his spouse. In any circumstance, the second spouse and the kids from the marriage won’t have any financial involvement with one another following the husband’s departure.

6. Special Needs Children.

Before age 18, SSI eligibility depends upon the parents’ assets and income. SSI eligibility normally is accompanied by eligibility for Medicaid, a state-administered national program that primarily provides medical aid. Many parents tend to be skeptical regarding the future and/or degree of their SSI and Medicaid applications. Regrettably, the special needs trust approach offers little consolation to all those parents who don’t have money to provide for their handicapped child or for parents that finally would need to disinherit their other kids to provide satisfactorily for your handicapped child. A solution to both these issues is for your parents to buy a survivorship life insurance coverage. The coverage could be possessed by the parents payable into a special needs hope tor the benefit of their handicapped child at the living parent’s departure. Upon the passing of the handicapped child before the entire distribution of the trust property, the assets remaining in the trust might pass into the other kids.

7. Annuity Arbitrage.

In exchange for this protection, the return on those investments is rather low. A much better choice to municipal bonds and CDs in most instances is a single-premium instant annuity contract. Not only is that the annuity a secure investment (dependent on the potency of the company ), it always will create a significantly greater return than muni-bonds or even CDs. The issue with an annuity is the fact that the payments cease if the annuitant dies. Thus, unlike the situation with muni-bonds or CDs, the mortgage owner’s kids won’t inherit the mortgage. The remedy is to obtain a life insurance coverage to”substitute” the riches lost if the annuitant dies.

8. Medicaid Planning.

For an individual to qualify for long-term maintenance Medicaid benefits (i.e., nursing home care), the receiver should have income and resources below frightfully lower degrees (i.e., as low as $2,000 in certain states). However, what about those individuals with substantial resources that aren’t financially eligible for Medicaid? What choices are available to them to secure their assets from the high price of long-term maintenance? A lot of men and women reject the idea due to the lack of management and fiscal freedom, among other advantages.

Secondly, long-term care (LTC) insurance may be purchased to cover such maintenance. LTC insurance premiums, but increase radically for men over age 65. A better answer is to buy life insurance. In the event the insured requires long-term maintenance and, thus, must use personal funds to cover such maintenance, the insurance proceeds will a while”replace” the resources spent on long-term maintenance. Life insurance ensures the insured’s heirs aren’t”disinherited” from the high price of long-term nursing care. In the event the insured never needs long-term maintenance, subsequently, upon the death of the insured, the heirs will be given a larger inheritance.

9. Charitable Planning.

Even without transport taxation, many charitably inclined persons are going to want to create lifetime gifts to their favorite charities. To begin with, the insurance profits finally will offer the desired capital present for a relatively modest outlay in the shape of premium payments. Secondly, each year that the donor-insured will obtain an income tax deduction equivalent to the payments gifted to the charity (subject to the 50 percent of adjusted gross income deduction limit ). Third, because just the cost price of life insurance is demanded, there are not any intricate details to be managed. Fourth, if the donor is unwilling or unable to present prospective premium payments to the charity, then the charity can continue to produce the premium payments or cancel the policy for the cash value.

10. Avoiding Income Taxes on Retirement Plans.

These programs, but are the most powerful way to distribute wealth due to the double taxation (income and estate taxes) levied on the distributions. Even with no estate taxation, upon the death of the surviving partner, the kids must start taking distributions and incurring income taxation. An improved strategy to get a charitably likely IRA owner may be to withdraw money from your IRA or retirement plan, cover the income taxfree, and utilize the after-tax proceeds to buy a life insurance plan for the sake of the player’s heirs.

The coverage could have a face value equivalent to the IRA’s projected value in the death of the player. Following the player has died, the heirs could receive the insurance proceeds earnings tax-free, and the remainder in the retirement program could pass to charity or into a private basis – income tax-free! For a married man, a survivorship policy may be utilized. The sole”failure” in this situation is that the IRS.


Although it’s not possible to forecast exactly what lies in store for transport taxes, for many reasons explained above, life insurance is uniquely suited to take care of many non-estate tax problems commonly faced in financial and estate planning.

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