I’ve mentioned before in this blog that many people who are employed are wealthier than they believe themselves to be. One reason for this is because certain assets are unused during the purchaser’s lifetime and are subsequently overlooked when that individual creates his or her estate plan. The most popular of these instruments is life insurance.
If you’ve something other than term life insurance, your life insurance policy, in addition to other benefits, if placed inside a trust may be used to even the distribution between your beneficiaries if your assets are difficult to divide. For example, let’s say you own a home valued at $300,000 and about $50,000 in cash. Let’s also say you have 2 daughters, Ivory and Jade. Ivory loves the house, lives there with you now, and wants to remain in it, whereas Jade doesn’t want to have anything to do with it. Well, if you sell the house and split the proceeds, that’s not being very nice to Ivory. On the other hand, if you give the house to Ivory and only leave the $50,000 to Jade, that’s not being very nice to Ivory. Moreover, leaving the decision to your two gems to battle out after you’ve passed away is just plain mean.
This is where life insurance may be beneficial. If, using the above example, you’ve a policy that’s worth at least $250,000, you could use that to even the distribution. Of course, to keep the example simple, we’ve not accounted for real estate taxes, mortgage payments, and so forth. However, a good estate planning team should be able to assist you in dividing the assets so that everyone is relatively satisfied.
Furthermore, if additional nuances are involved, a trust can also be the owner of a life insurance policy known as an Irrevocable Life Insurance Trust (ILIT). However, the trust must be drafted properly, taking into account how the premiums are paid, and how the beneficiaries are notified of the funding of the trust for premium payments by way of “Crummey Letters.” Other components of your estate plan must also be considered, such as retirement and public benefit plans.
Still, using life insurance and a trust generally provides a number of benefits if properly implemented. The proceeds are removed from your estate, which may reduce your gift and lifetime estate taxes, the distributions to your beneficiaries are generally income tax free. Also, these types of trust may act as a credit shelter. Finally, because a trust is involved, typically probate is avoided.
So if your spouse jokes around like mine does, about being worth more dead than alive, just do what I do: grin and raise an eyebrow.
