Life Insurance – An Estate Planning Swiss Army Knife

by | Dec 29, 2021 | Uncategorized

“Using life insurance successfully can be a complicated – and sometimes very complicated—wealth planning exercise,” Joseph Darby III and Kimberly Furnald write in Financial Advisor Magazine. The authors aren’t referring to the use of insurance as a way to provide a death benefit to help support dependents in the event of an untimely death, but to various ways of taking advantage of certain tax benefits that cash value life insurance can provide to the still-living along with their heirs.

At Geyer Law, where we are board certified trust and estate attorneys*, we are particularly interested in several provisions of the SECURE Act. In fact, last year in our Geyer Law blog we discussed an estate planning technique in which clients draw down their IRA balances (taking advantage of today’s low tax rates), using those withdrawals to pay annual life insurance premiums for policies held inside Irrevocable Life Insurance Trusts. The benefit of an ILIT is that life insurance is owned outside the estate of the insured and therefore greatly enhances the after-estate tax wealth enjoyed by the insured’s spouse and/or heirs.

While at Geyer Law, we do not sell life insurance, working with each client’s insurance and tax advisors to formulate plans, we advise many business owner clients and are therefore interested in the ways life insurance can be used to fund buy-sell agreements between partners. A buy-sell is a legal arrangement in which either the entity or the business owners agree to buy out the equity of a deceased owner. A problem arises, however, when insurance proceeds are paid into the taxable estate of the owner who died. The solution lies in arranging for the proceeds to be paid tax-free into a life insurance trust for the spouse and other heirs.

“The vehicle used to transfer money after death will have to change from the IRS to the more tax-friendly life insurance,” writes Ed Slott in Financial Planning. Slott warns that “tax-deferred assets can hurt us when we’re most vulnerable if we’re not careful’. What, exactly, makes life insurance more tax-friendly than IRAs? Life insurance proceeds paid to a trust after death are income-tax free.

Another important area of estate planning in which life insurance is a useful tool is special needs planning, an important practice area at Geyer Law. The purpose of a special needs trust is to allow a disabled beneficiary to benefit from funds while not disqualifying that beneficiary from receiving governmental benefits. Life insurance can be the funding vehicle for a special needs trust.

– by Rebecca W Geyer

* Certified by the Indiana Trust and Estate Specialty Certification Board
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