Life insurance for the estate plan - Free Access to our Network of Attorneys

Many families find life insurance to be an inclusive part of an estate plan. Life insurance for the estate plan can help accomplish families’ financial objectives by providing:

• Immediate cash for payments of debts, costs of the last illness, burial expenses, costs of administration, other settlement costs, and, if necessary, payment of federal estate taxes and elimination of the possibility of a forced sale of assets to generate needed cash.
• Funds for the surviving partner to buy the partnership interest of the deceased partner from the heirs. This enables the business to continue as an on-going enterprise.
• Cash when an heir has a contract to buy a family member’s farm or other business at his/her death. The heir could insure the family member’s life as a means of providing cash to purchase the business should the family member’s death occur before the heir has built enough cash reserves.

Additional ways life insurance for the estate plan can meet a family's estate planning goals

• Some parents buy life insurance on an adult son or daughter who is in the process of taking over the family business or other business. Such action offers protection for parents so the death of the adult child will not disrupt the business.
• Life insurance proceeds can be used to provide off-farm heirs with “equitable” treatment if the parents’ desire is to pass the business intact to a farming son or daughter. Doing this can prevent the farm from being split into smaller units of uneconomical size to make an “equal” division among children. Leaving the business to the operating heir and life insurance proceeds to off-farm heirs prevents the operating heir from having to buy out the interests of other heirs when he/she may be unable to afford it.
• Life insurance can also be used to create an estate where one would not otherwise exist.

Tax Status

Life insurance proceeds can be subject to the federal estate tax under certain circumstances. Life insurance proceeds are subject to federal estate taxes if the policy holder has “incidents of ownership” in the policies or if the proceeds are payable to the estate. Examples of “incidents of ownership” include the policy holder's right to change beneficiaries, to borrow the cash value, to select dividend options, or to change premium payment schedules.
If your objective is to avoid having the value of life insurance included in your gross estate for federal estate tax purposes, you must give up ownership of the policy. To accomplish this, all incidents of ownership must be surrendered or transferred to someone else, such as your spouse, child or to a trust.

Changing Ownership

To make sure beneficiaries fully benefit from each dollar of life insurance, the insured may find it advisable to establish ownership in someone else’s name (spouse or children, for example) for all or some of their policies. If the insured does not retain “incidents of ownership” in the policies, life insurance proceeds will not be included in the gross estate for federal estate tax computation purposes.

A life insurance policy is considered a gift when transferred after the initial purchase. The value of the gift is the interpolated terminal reserve in the policy at the time of the transfer. This amount can be provided by the life insurance company. There may be federal gift tax consequences if the amount exceeds the federal gift tax annual exclusion of $14,000 per donee.

If your total estate, including life insurance proceeds from policies owned by you, is less than the amount subject to federal estate taxes ($5.43 million in 2015), the form of ownership of your life insurance policy may not be of concern to you. When your estate reaches the taxable limits, we can help you evaluate the federal estate and gift tax consequences of your ownership of any life insurance policies to ensure that your overall estate planning goals and objectives are accomplished.

Example: A widower left an estate valued at $5.43 million to his daughter. He also had a $500,000 life insurance policy in which he had incidents of ownership. Upon his death, the value of the $500,000 life insurance was added to his other assets. The amount increased the taxable value of his estate to $5.93 million, resulting in a federal estate tax of $155,800 (2015).
If the father had transferred ownership of the life insurance policy to his daughter and then lived more than three years, the $500,000 proceeds would not have been included in the federal estate tax computation. The estate tax in this case would have been zero instead of $155,800. The father’s estate could have saved $155,800 in federal estate taxes by transferring the ownership of the policy to his daughter. As the new owner of the policy, the daughter should make the insurance premium payments. She can name herself as the beneficiary; the insured is the father.

Designation of Beneficiaries

Designation of beneficiaries of life insurance policies is a very important estate planning consideration. A life insurance policy is a legal and binding contract that directs the distribution of proceeds to designated beneficiaries.
A will controls the disposition of life insurance proceeds only if the estate is designated as the beneficiary. Beneficiary designations on the policy contract should be consistent with your overall estate planning goals and objectives.
Because situations and family conditions change, review your beneficiary designations periodically and change them when appropriate. Births, deaths and divorce are examples of occasions where a review of life insurance beneficiary designations is appropriate. If a change is needed, we can get the necessary updates completed by send you a change of beneficiary form to fill out and return. The company will attach the completed form to your policy and the change of beneficiaries is accomplished.

Parents may think their children are bright but not believe they are capable of managing $100,000 or $200,000 in life insurance proceeds while so young. Rather than leaving the proceeds directly to the children and nominating a conservator to manage them until the children reach age 18, parents can have the assets left in a “family” trust for the children’s benefit. Their wills can indicate that insurance proceeds are to be paid into the trust if both parents die. The parents select and name a trustee to manage the assets. They prepare a trust agreement giving the trustee the power to manage the trust assets and use the income for the children’s benefit. The trust agreement is effective upon the death of both parents. A trust can avoid the inflexibility of conservatorship which passes the assets to the children at age 18. The trust agreement can indicate any age at which the trust terminates and that age could be beyond 18.

We partner with NETLAW.COM and begin the life insurance discussion at the estate level for one comprehensive plan.