The role of life insurance may not seem directly related to the distribution of money and property in your estate plan. However, it can be an integral and important part of the estate planning process. In addition to providing a sizable sum of money to your heirs, a life insurance policy offers other significant benefits, especially under Texas law.
UNDERSTANDING LIFE INSURANCE BENEFITS
When planning your estate, it’s important to grasp how life insurance offers more than just a financial payout. Life insurance provides several key benefits that greatly enhance your estate plan. By integrating life insurance into your plan, you ensure that your loved ones are supported and your wishes are executed smoothly.
The primary benefits of life insurance policies include:
- Immediate Cash Available: Upon death, life insurance offers immediate cash to pay debts, final income taxes, and funeral expenses, easing the financial burden on your family.
- Paying of Estate Taxes and Avoiding Forced Asset Sales: Estate taxes are covered, preventing the need to sell assets under pressure.
- Tax-Free Proceeds: Life insurance proceeds pass to the named beneficiary free of income tax.
- Funding Trusts for Dependents: Proceeds can be transferred to a trust for the benefit of minor children, special needs individuals, or aging relatives.
- Irrevocable Insurance Trusts: When owned by an irrevocable insurance trust, the proceeds can be payable to someone other than the insured’s estate, such as fulfilling marital settlement obligations.
- Funds for Buyouts in Businesses: A policy can fund a buyout of the insured’s interest in a closely held business.
- Avoiding Probate: Life insurance proceeds transfer to your loved ones outside the probate process, which validates a will.
Why Immediate Cash from Life Insurance is Crucial
Life insurance ensures your loved ones have cash funds immediately available. Often, the passing of a family member comes with unexpected expenses. Many Texans have investments like real estate or retirement accounts such as 401(k)s, which are not liquid assets.
Having liquid assets available when a family member dies is highly beneficial. This allows for immediate access to cash funds for expenses like funeral costs or outstanding debts. Without liquid assets, loved ones may face financial strain or have to wait for lengthy probate processes. This can cause unnecessary stress during an already difficult time.
Life insurance proceeds protect families from having to force the sale of homes and other investments at unfavorable tax rates. For example, if you have a home or a car that isn’t paid off, your family could face short-term liabilities requiring cash for ongoing payments.
The Role of Life Insurance in Estate Planning Strategies
One popular estate planning strategy is an Irrevocable Life Insurance Trust (ILIT). An ILIT holds a life insurance policy outside the insured person’s estate, ensuring that the proceeds are not subject to estate taxes. This provides financial security for your loved ones without being part of the taxable estate. Once established, an ILIT cannot be changed or revoked, and beneficiaries cannot modify or rescind it.
Heirs gain several financial and legal advantages with an ILIT, including asset protection and favorable tax treatment. Assurance that the proceeds will be used according to the benefactor’s wishes is another benefit. Typically, life insurance policies are the chief assets held in an ILIT.
Before purchasing a life insurance policy, especially if creating an ILIT, consult with an estate planning attorney who can guide you through potential income and estate tax consequences. If your estate is large enough, it may be subject to federal and state estate taxes, depending on applicable laws at the time of your passing.
Using a Gifting Strategy for Your Life Insurance Plan
You may be able to gift an existing life insurance policy to your ILIT. However, if you die within three years of making the gift, the policy amount may be included in the total value of your estate due to the “lookback period.” Federal estate and gift tax exemption amounts frequently change, so funding your ILIT by purchasing a new policy can avoid this period.
When using an ILIT, consider your situation before purchasing a life insurance policy and designating beneficiaries. Variations of permanent life insurance, such as whole life, universal life, and variable life insurance, can be confusing.
If you own a business, life insurance provides cash to buy out other siblings’ interests while leaving the business intact. Blended families also benefit from life insurance payouts, ensuring all children receive an inheritance.
ENSURING YOUR ESTATE PLAN INCLUDES LIFE INSURANCE
Include life insurance in your estate plan to increase the wealth of your heirs and provide a ready source of cash for financial obligations after your death. The form of life insurance that best suits your needs depends on your age and situation. Let’s discuss how you can effectively use a life insurance policy to transfer wealth to your loved ones!
Bromlow Law, PLLC and Laura L. Bromlow, are dedicated to the practice of Elder Law and Estate Planning. Our practice focuses solely on working with clients in these and closely related legal fields. Laura L. Bromlow is a Certified Elder Law Attorney with the National Elder Law Foundation. Bromlow Law, PLLC strives to enhance communication among family members and loved ones and to keep them all out of conflict so they can stay out of court. We want to help you keep your close circle safe!
Please contact our office today at (281) 665-3807 to schedule a free consultation to discuss your legal matters. We look forward to the opportunity to work with you.