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Ways to Use Life Insurance in Your Estate Planning

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Life insurance can help you provide the extra cash that protects your estate from being gouged by estate taxes. This article shows you a couple of ways it can do this.

*Get cash for settling estate costs and preserving your holdings intact:

At your death, estate taxes are imposed on the value of what you own. If you’re married, these may be delayed until your spouse’s death. Other costs such as funeral expenses, debt settlement, and administration fees can add to the need to have cash.

Life insurance can supply this cash. Other than cash on hand, no asset can provide such a predictable and immediate influx of dollars to pay the costs of dying as can insurance.

Without available cash your estate may have to liquidate your investments or business interests to pay estate taxes. Such untimely liquidation can cause irreparable losses and opportunities. To maintain your estate’s investment holdings or business intact so they pass on to your children, you or your spouse may purchase insurance to alleviate having to liquidate those precious holdings.

If you’re married, survivorship life insurance generally is used to provide liquidity for final expenses when the second one of you dies.

*Make that charitable gift and still transfer your wealth to your children:

You can combine charitable giving with life insurance to make the donations you always wanted to. And you can do this without reducing the wealth you want to pass on to your beneficiaries. Here’s how it works…

You can – if you have the wealth – give a substantial lifetime gift of appreciated property to a qualified charity. This gifting generates a significant income tax deduction. With the income tax savings you get from this deduction, you can purchase life insurance whose proceeds at your death will replace the very wealth that you gave to charity. It’s like eating your cake and giving it away too.

*Foregoing ownership of life insurance will further reduce your estate taxes:

In both these examples, if you maintain ownership of the life insurance, then its death proceeds would be added to the value of your estate. This, in turn, would add to the estate tax on your estate. Realize that though life insurance proceeds are free of income tax, your ownership of the life insurance makes those proceeds part of the value to your estate – and therefore subject to estate tax at your death.

You can avoid that estate tax on those life insurance proceeds if you don’t own the life insurance. So you can eliminate ownership of that life insurance either by giving it away at least 3 years before your death or by having some other person or legal entity to purchase and own in the first place.

Without your ownership of the life insurance on you its proceeds can still be used for paying all those final expenses without adding those proceeds to your estate subject to estate tax. Trusts are common legal entities for purchasing and owning life insurance in such circumstance.

Source by Shane Flait