Sataya Froemming- Client Service for Estate Markets
With the enactment of the American Taxpayer Relief Act of 2012, balancing income and estate tax planning has become a focus of clients wanting to minimize overall tax exposure. Due to the flexibility that life insurance can present, it offers important aspects that shouldn’t be overlooked when creating an estate plan.
For example, a policy’s cash value growth and conversely, a policy’s cash access (through loans or illustrated distributions to cost basis) are generally not subject to income tax. Distributions to beneficiaries at an insured’s death, are also a tax free distribution. As always, specific policy type or activity can alter the tax status of any policy.
Many whole life and universal life policies offer the ability to alter the policy through additional premium payments and by decreasing total coverage amounts, as long as the changes are kept within company parameters. This allows for changing needs to be addressed accordingly as the policy owner’s needs change.
When considering tax implication during estate planning, life insurance can provide options when deciding to gift or hold an asset if it is held outside a taxable estate. Since traditional whole life and universal life are not connected to the ups and downs of the market, any possible exposure from market loss for assets tied to the market can be offset by the stability of life insurance.
In the March 19, 2015 article, Life Insurance Planning Insights from the 2015 Heckerling Institute, the AALU states, “Life insurance can provide a client’s estate with an immediate and substantial source of liquid assets at a predictable value, a benefit not found in other assets.”
Caveats when using life insurance in estate planning can include trustee selection when naming an irrevocable life insurance trust as beneficiary, the trustee’s administration of the ILIT, and the provisions that the trustee is held to which may have been established decades prior to distribution.
With proper planning while working with an estate planner, life insurance offers many benefits that can enhance the client’s financial plan with flexibility and possible tax favored outcomes.
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