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T&E TALK: Life Insurance Remains a Powerful Estate Planning Tool For Nontaxable Estates

Posted by Scott T. Ditman, CPA/PFS on Jun 6, 2016 11:00:00 AM
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With the estate tax exemption amount at $5.45 million, estate taxes are no longer a concern for many families.  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 have charitable intentions and own highly appreciated real estate or other assets. You wish to dispose of the assets 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 and your spouse will 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 you and your spouse die, 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 (a cost-effective second-to-die policy, for example) to replace that lost wealth.

Treating children equally
If much of your wealth is tied up in a family business, treating your adult children fairly can be a challenge. It makes sense to leave the business to those children who work in it, but what if your remaining assets are insufficient to provide an equal inheritance to children who don’t work in the business? For many families, the answer is to purchase a life insurance policy to make up the difference.

Should you have questions about using life insurance as an estate planning tool, contact me at or your Berdon advisor. We can help you determine which type of life insurance policy is right for your situation.

Scott T. Ditman, a tax partner and Chair, Personal Wealth Services at Berdon LLP, New York Accountants, 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.

Topics: T&E TALK

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