Importance of Life Insurance in Estate Planning

You can use life insurance as part of your estate planning strategy by setting up an irrevocable life insurance trust. This helps you avoid federal estate taxes Life insurance can also help you protect your business interests. Keep reading to learn more about the benefits of incorporating life insurance in your estate planning.

Estate Planning and Life Insurance
Besides leaving a lump of cash for your beneficiaries, life insurance can help with final expenses such as funeral costs, final income taxes and debts. Your beneficiaries can use the money to avoid selling off assets, and life insurance proceeds pass to your beneficiaries without incurring income taxes.

Many policyholders use life insurance to pass on funds to minor children or disabled relatives. Passing the proceeds through an irrevocable insurance trust helps your beneficiaries avoid probate. For example, you can use the trust to set aside child or spousal support.

Additionally, business partners sometimes use life insurance proceeds to fund a buyout if one of them dies.

Irrevocable Trust
You can use life insurance to set up an irrevocable trust. This comes with significant tax benefits, so meet with a professional to ensure you follow all the necessary steps. During this process, you transfer your policy to the trust. Funds are provided for any premiums due. You must typically survive for three years after the transfer to keep the life insurance proceeds out of your estate where it may be subject to federal taxes.

Talk to your insurance agent about the type of insurance that works best for you, depending on your age and life situation. Let them know you plan to transfer the proceeds to an irrevocable trust. When you set up the trust, you must notify the insurer that the policy owner has changed. This may involve filing a gift tax return. For new policies, ensure that the documentation reflects that the trust owns the policy.

Things to Consider
When properly used, life insurance provides financial security for those you leave behind. Funding a trust at death with life insurance proceeds lets you provide for your beneficiaries. Because irrevocable trusts have stringent requirements, some policyholders choose a revocable trust. Revocable trusts are not exempt from federal estate taxes, but they have all the other benefits of using life insurance in estate planning. Both types of trust establish care for minor children, elderly relatives and others who rely on you financially.

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