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LIFE INSURANCE AND ESTATE PLANNING

Has anyone told you that life insurance plays an important role in your estate planning strategy?

It certainly can. Many people have used life insurance to preserve the value of their estate, provide for their dependents or cover taxes, debts and other costs in the event of their death.

Providing Liquidity for Expenses

Life insurance may be a lifesaver for people who have families, houses, businesses or something else that requires day-to-day payments to cover expenses. It can provide for funeral costs, school tuition, home mortgage payments, utility bills, food, business expenses and more. If there is a special needs child in the family, life insurance can cover accompanying expenses. If it is a child with special needs who is receiving government benefits, it’s important to plan effectively to ensure the life insurance does not make him or her ineligible.

One way to plan ahead for different life situations is to set up an irrevocable trust and make the trust a beneficiary of the insurance.

Why is this important? If you have a child with special needs and they receive a lump sum of money above the limit allowed by Medicaid or SSI, your child could be unnecessarily rendered ineligible for those benefits. However, if the money is in an irrevocable trust, it may be used to supplement the child’s special needs care without disqualifying them.

Other life situations also exist. Consider bankruptcy, divorce and lawsuits. In each of these scenarios, if the individual receives the money, it may be at risk. But if the money stays in a proper trust, it is protected.

Preserving Your Estate

Grantor’s (those who create the estate plan) may use insurance to cover debts and other costs that would otherwise leave the estate penniless. By having life insurance, you receive a liquid cash injection that can cover costs the estate would otherwise have to cover and preserves the estate for the beneficiaries. Trusts also allow for equal distributions to beneficiaries and fractional distributions. This means the trustee distributes a fraction of the trust assets and allows the rest to continue to grow and grow and grow.

Probate Costs

Probate is a legal process that determines the validity of a will. If a will is not involved, Probate may still be necessary. The Probate Court oversees the transfer of the estate assets from the decedent to the beneficiaries. Life insurance can cover costs of Probate if needed. If probate does occur, it usually takes a year or longer and can be very costly. A better scenario would be for the Grantor to ensure that all of the assets are outside of probate. Then Probate would likely not be necessary.

How is this done?

Again, creating a trust to hold your assets usually prevents your estate from having to undergo the probate process. A trust is a contract that controls your property over time, so the trust determines where the property goes. Not a will and not the government.

Creating Your Estate

Life insurance proceeds transfer to designated beneficiaries tax free. This is still true if theproceeds initially go to your trust.

What if there’s a business involved in the estate?

Usually there are family members involved in the business and family members not involved in the business. Those involved will likely get more of the estate because it is wrapped up in the business, which they will continue to run. One way to equalize the distribution for those who are not involved in the business is through life insurance. This can also be accomplished by setting up a buy-sell agreement.

Leaving Money to Charity

Life insurance may also be a way to fund charitable donations. Many people have done what’s called a “charitable split interest gift”. There are several variations of this model but essentially the Grantor may purchase insurance and gift an amount of the proceeds to a charity of their choice or a number of charities. One way to implement this strategy is through setting up a donor advised fund or DAF.

Protection from Creditors

As mentioned before, if a beneficiary receives life insurance proceeds, creditors will attempt to take what they are after. Setting up a trust as a beneficiary of the life insurance policy provides a situation where the beneficiary can still benefit from the life insurance proceeds without making them subject to creditors. This is because they are trust assets and not the assets of the debtor. This kind of protection requires that the trustee of the trust have absolute discretion over the trust assets.

If you have been thinking about using life insurance in your estate planning, we can help. We know trusted advisors who provide life insurance. We also know how life insurance works with estate planning. Please contact Durfee Law Group at 480.324.8000.

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