Before you make the contention that you don’t have enough money to establish an “estate,” consider this: everything you own or control counts. From tangible assets like your car, your wedding ring and your antique Radio Flyer to intangible assets like your bank accounts, annuities and investments, your estate encompasses all your life’s treasures. Crafting a thoughtful plan right now helps you protect your estate while you’re alive, and it can also provide many benefits for you and your family during and after your retirement.

Upon your death, you can plan to do three things with your estate: you can donate it to a philanthropic organization, you can give it to the government through estate taxes, or you can designate certain people to get certain assets.

If you choose the third option, it’s likely that you’re doing so because you want to leave a legacy for your loved ones. You want them to enjoy what you enjoyed, and you want them to experience the benefits of your estate to their fullest extent. Unfortunately, the costs of executing an estate settlement can add up quite quickly, and the taxes assessed on some estates can end up being more of a burden than a bonus for your heirs.

Moreover, the restrictions placed on the payment of estate taxes can increase stress. These taxes must be paid before estate distribution occurs, and they must be paid in cash within nine months of death. If payments aren’t made in a timely fashion, the amount due is subject to interest. Many families don’t have that kind of cash readily available, so they turn to banks to take out loans (which could end up costing them more, since the money they were loaned will have to be repaid with interest), or they sell various assets (which, depending on the situation, could force them to sell assets for substantially less than market value). What many people don’t know is that if you plan ahead, life insurance can help you offset some of these costs.

While it’s well known that life insurance provides a financial replacement for income lost upon one’s death, these policies can also be structured such that your heirs benefit from your policy’s proceeds tax-free. Most life insurance proceeds are received income tax-free, but in order to receive these benefits estate tax-free, you need to implement a particular plan.

For example, establishing an Irrevocable Life Insurance Trust (ILIT) allows you to reduce your overall taxable estate and provide immediate liquidity for estate settlement costs, so that you can maximize the wealth that’s passed on to your heirs. In this plan the ILIT, and not the individual, owns the life insurance policy. Upon one’s death, the trustee receives the benefits and passes them on to the estate’s executor to help pay for various estate taxes and other settlement costs, effectively bypassing federal estate taxation.

You can also use a life insurance policy to leave funds to a particular charity for a tax advantage. It’s important to make sure that the charity is a 501(c)(3) nonprofit organization and that it can accept donations in the form of life insurance. To receive a tax deduction, you can donate your policy by naming the charity as both owner and beneficiary. As you make donations to the charity each year so that it can pay your policy’s premium, you can add the cash value of the policy and money you pay for premiums to your tax deductions.

Establishing a careful estate plan can positively affect your heirs now and in the future, and it’s an essential part of any financial plan. Your favorite philanthropic causes could also benefit. If you decide to include life insurance as part of your estate plan, you’ll want to make sure that it’s the right kind of life insurance, such as whole or universal life insurance.

Contact your financial advisor today to coordinate an appointment with one of our insurance specialists to discern which kind of life insurance as an estate planning tool is right for you and your financial situation. If your goal is to leave your loved ones and/or your favorite causes with the maximum amount of support possible, our risk management team is ready to help.

Jennie Boland

Jennie Boland

Senior Vice President, Financial Advisor

CFP®, Series 7, 24 & 63 Securities Registrations,1 Insurance License Jennie, a CERTIFIED FINANCIAL PLANNER™ professional, joined Wealth Enhancement Group in August 2009 and brings more than 16 years of experience to her role as Senior Vice President, Financial Advisor. Jennie is also a member of the Roundtable—the team of specialists and advisors who have distinct areas of expertise. Jennie’s knowledge of wealth management strategies makes her...Read More