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Kingston: Estate planning with life insurance | Local Business

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Life insurance is most often used to provide income and reduce debt for your survivors, at your death. Proceeds from life insurance are, almost without exception, paid income tax-free. While term life insurance typically expires at the end of a period of years, various forms of cash value life insurance including variable life, universal life, and whole life usually remain in-force longer. If you no longer need cash value policies for income protection, you may be able to repurpose them to meet estate planning objectives. The key is to determine the appropriate ownership and beneficiary designations of these policies.

Life Insurance Ownership

Even though life insurance proceeds are income tax-free, the cash value, or the death proceeds may be subject to estate taxation. If you own life insurance for yourself, the death proceeds will be included in your gross estate. If you are the owner of life insurance, insuring another person, ie, your spouse, the cash value of the policy will be included in your gross estate. The 2022 Federal Estate Tax Exemption is $12.06 million, scheduled to reduce to approximately $6.4 million in 2026, when adjusted for inflation. The Illinois Estate Tax Exemption is $4 million. When your taxable estate, including the death benefits insuring yourself or the cash value of life insurance policies that you own insuring someone else, exceed the exemption, consider changing the ownership to remove the death proceeds or the cash value from your taxable estate. When purchasing new insurance, consider having it owned outside of your taxable estate. An irrevocable life insurance trust (ILIT) is frequently used for this purpose. When properly managed, an ILIT provides a method for removing life insurance death proceeds from all potential income and estate tax.

Beneficiary Designations

Life insurance proceeds pass directly to the named beneficiaries and can be changed by the policy owner at any time. Except, if the life insurance is owned by an irrevocable trust, as these trusts cannot be changed. If you change your estate plan, beneficiary designations should be coordinated with your plan. If you have a revocable living trust, discuss with your attorney naming your trust as beneficiary. This may allow your surviving spouse to determine at your death, based on total assets and needs, if the life insurance proceeds should be allocated to the marital trust or the family trust that are typically created in a revocable trust.

Irrevocable Life Insurance Trust (ILIT)

ILITs are useful for owning life insurance, providing liquidity to pay estate tax and estate settlement expenses with tax-free dollars. This may allow other assets to remain intact, not needing to be liquidated, ie, real estate, securities, and business ownership. The ILIT is named as the owner and beneficiary of life insurance. The terms of the trust document control the distribution to the ultimate beneficiaries of the trust. ILITs can also be useful for equalizing estate distribution. For example, you are leaving your business valued at $3 million to your daughter and wish to leave comparable assets to your son, establishing an ILIT funded with tax-free life insurance for your son, may be an efficient method of achieving this objective.

Please be sure to consult with an estate planning attorney and your accountant to determine how this information may apply to your unique situation.

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Life Insurance has unique tax advantages, unlike any other property, that can be utilized to enhance your estate plan. Coordinating ownership and beneficiary designations with your plan will provide optimal results.

Kevin Kingston, CLU, is managing director and financial advisor at Savant Wealth Management; savantwealth.com

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