I was speaking with a new client recently about some necessary updates to their estate and legacy plan. This client was a married couple and had not updated their estate and legacy plan since their children were in diapers. Now, their children had careers and families of their own.
As I reviewed their existing estate and legacy plan, I immediately notice there were two life insurance policies. One for him and one for her, both of which had a death benefit of $5 million. In my review, the beneficiaries were listed as the surviving spouse, and then the three children as the contingent beneficiaries. When I asked why they chose their beneficiaries in the manner that they did, the client informed me “because life insurance passes tax free.”
I am continually amazed at the common misconceptions that people have when it comes to life insurance and taxes!
The fact of the matter, everything that you own, including your life insurance death benefits are included in your taxable estate. In the case above, when we add the $5 million death benefit to the $1.5 million in other assets, this client had a $6.5 million estate. This means that this client would be facing approximately $760,000 in estate taxes at the death of the first spouse. This Could Potentially Be Higher if the Estate Went Up In Value (as it surely would with a $5 million death benefit going to the surviving spouse) at the Death of the Second Spouse!
The Moral of the Story is that Life Insurance, Although Important and Imperative for Every Family, Can Create More Problems If Not Handled Correctly!
When you have life insurance, it is very important to include the death benefit as part of your estate and legacy planning!
One way to address a taxable estate issue as the client above had is with an Irrevocable Life Insurance Trust. This is an advanced estate planning and legacy planning strategy where the life insurance death benefit is removed from the taxable estate. In the case above, instead of having a $6.5 million estate at death of the first spouse, there would be a $1.5 million estate, an estate tax savings of $760,000!
However, it is not just the estate tax savings that this type of strategy can provide. In addition to the tax savings, listed below are just some of the additional legacy planning benefits that this type of strategy can provide:
- Shields the Cash Value of Your Life Insurance Policy from Creditors
- Can Control How, When and Why Your Beneficiaries Receiving the Proceeds from the Policy
- Protects Benefits of a Beneficiary Who Is on Government Assistance
- Protect the Life Insurance Proceeds from the Beneficiaries Divorcing Spouses, Creditor Claims, Lawsuits, and Other Predators
To Learn More About Irrevocable Life Insurance Trusts, Please Contact Us at (615) 472-2482 to Schedule an Initial Consultation to Meet With Our Office!
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