THE ATTORNEYS CORNER: LIFE INSURANCE AS AN ESTATE PLANNING TOOL

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“Articles Concerning Trusts, Wills, Probate, Family Law & more”

By Stephen C. Ross, Esq.

July 4, 2014 (San Diego County) – Life insurance can often be used as a significant element of an estate plan. It may provide a liquid source of funds for the insured’s estate to pay estate taxes and other death-related expenses. Such insurance is often used to establish or supplement an estate to support the insured’s family should he or she die. A family business may use life insurance to create a source of funds for surviving owners to purchase the decedent’s company interest pursuant to a buy-sell or shareholder’s agreement.

The two fundamental types of life insurance are “term” and “whole life.” Policies are complex and include numerous variations of the two fundamental categories. Term insurance provides temporary coverage for a specific period of time. It provides protection in the event of death but does not have a cash value. It is the least costly type of life insurance for younger people. Policies may be either renewable or nonrenewable. Whole life premiums are typically fixed and do not increase with age. Premiums are generally payable for the insured’s life or until the policy face value equals the policy reserves. Premiums are split between an investment account (savings) and risk protection (term insurance).

Life insurance proceeds may be excluded from the insured’s estate through the use of an Irrevocable Life Insurance Trust (ILIT). An ILIT is an irrevocable trust that creates a way for the insured to provide for his or her family while excluding the insurance proceeds from his or her estate and avoiding estate taxes on the proceeds. ILITs are typically used by people whose estates are large enough they may or will be subject to estate tax.

An ILIT can be set up by purchasing a life insurance policy in the name of the trust or by transferring an existing life insurance policy into the trust. The preferred method of creating an ILIT is to purchase life insurance in the name of the trust.

The benefits of an ILIT include: (1) continuous management of assets pursuant to the trust terms; (2) increase your estate size without increasing the estate tax liability; (3) assist with avoiding or reducing estate tax liability; (4) provide cash to pay off debts or tax obligations while allowing you to keep other assets; (5) protect beneficiaries from creditors; and, (6) transfers can be made out of the estate with little or no gift tax liability.

Stephen represents estate planning, trust, will, probate, trust administration, business formation, stepparent adoption and family law matters. He conducts estate planning and probate seminars throughout San Diego County. For more information or to schedule a seminar contact Stephen at (619) 795-8524, stephen@stephenrosslaw.com or visit www.stephenrosslaw.com.

Disclaimer: Information contained in this article is believed to be accurate. However, you should seek professional legal advice before relying on the information. Stephen is not licensed to practice law in any state other than California and “The Attorney’s Corner” is not intended as an advertisement.

Visiting Stephen’s website does not create an attorney-client relationship and confidential information is not protected until a written agreement is signed.


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