For years, life insurance has played a critical role in estate planning, providing a source of liquidity to pay estate taxes and other expenses. It’s been particularly valuable for business owners, whose families might not have the liquid assets they need to pay estate taxes without selling the business.
Under the Tax Cuts and Jobs Act, the estate tax exemption has climbed to an inflation-adjusted $10 million through 2025 (projected to be just over $11 million for 2018). Even before the increase, federal estate taxes weren’t a concern for the vast majority of families, and now even fewer families are at risk. But even for nontaxable estates, life insurance continues to offer significant estate planning benefits.
Replacing Income and Wealth
If you die unexpectedly, life insurance can protect your family by replacing your lost income. It can also be used to replace wealth in a variety of contexts. For example, suppose you own highly appreciated real estate or other assets and wish to dispose of them without generating current capital gains tax liability. One option is to contribute the assets to a charitable remainder trust (CRT).
As a tax-exempt entity, the CRT can sell the assets and reinvest the proceeds without triggering capital gains tax. In addition, you can enjoy an income stream and charitable income tax deductions. Typically, distributions you receive from the CRT are treated as a combination of ordinary taxable income, capital gains, tax-exempt income, and tax-free return of principal.
After the end of the CRT’s term (which can be a specific number of years, your lifetime, or even the joint lifetimes of you and your spouse), the remaining trust assets pass to charity, reducing the amount of wealth available to your children or other heirs. But you can use life insurance to replace that lost wealth.
You can also use life insurance to replace wealth that’s lost to long term care (LTC) expenses, such as nursing home costs. Although LTC insurance is available, it can be expensive, especially if you’re already beyond retirement age.
For many people, a better option is to use personal savings and investments to fund their LTC needs and to purchase life insurance to replace the money that’s spent on such care. One advantage of this approach is that, if you don’t need LTC, your heirs will enjoy a windfall.
Finding the Right Policy
These are just a few examples of the many benefits provided by life insurance. We can help you determine which type of life insurance policy is right for your situation. I can be reached at SDitman@BerdonLLP.com or contact to your Berdon advisor.
Scott T. Ditman, a tax partner and Chair, Personal Wealth Services at Berdon LLP, advises high net worth individuals and family/owner-managed business clients on building, preserving, and transferring wealth, estate and income tax issues, and succession and financial planning.