The Best Way to Own Life Insurance

What is the best way to own life insurance?  For many with estates to protect, it is often best for the insured (e.g. a husband and wife) not to own the life insurance at all.  If the insured owns it, then the proceeds are subject to the federal estate tax in the insured’s estate.  With these tax rates exceeding 40%, avoiding this tax can save the family lots of money.

It may be best to have a child, for instance, as trustee of an irrevocable trust established by you and your spouse be the actual owner. 

Doing this can provide you and your family with the following benefits:

1.) It can provide liquidity to pay any federal estate tax that may be due.  Accordingly, it can circumvent the need to borrow against assets or fire sale assets to come up with the tax money due.

2.) The amount left over after taxes are paid can be left for your loved ones in trust.  This can protect these monies from being attached in lawsuits or divided in divorce proceedings.

Perhaps the most beneficial scenario is to have the life of a husband and wife be insured, with a child, as trustee, be the owner.  Second to die life insurance is usually much less expensive.  I have seen cases where less than $20,000 per year in premium (paid by your child, as trustee, with gifts made by you to your trust) can provide a $1,000,000 benefit upon the second of a married couple to die.  If done properly, this $1,000,000 will not be subject to the federal estate tax or the income tax.  If left in trust for your children, the proceeds can also be protected from equitable distribution in divorce and from other lawsuits. 

For those with estates to protect and who wish to leave a legacy, sometimes the best way to own life insurance is not to own it at all

Contributed by:

Mark F. Winn

Attorney at Law, PLLC

Life Insurance Can be a Treasure 

Many people fail to realize that the death benefit on a life insurance policy can be subject to the federal estate tax.  If not planned for, the benefit you have paid for can be reduced dramatically.  Fortunately, this problem can be avoided.  If you retain an “incident of ownership” in a life insurance policy, like the right to change the beneficiary, then the proceeds are included in your estate for purposes of the federal estate tax. 

Proper planning can avoid this unnecessary and undesirable consequence.  Advance planning can help ensure that the full benefit of what you have paid for will benefit loved ones and be protected from the ravages of the federal estate tax in their estate, their inability to manage the funds, claims of their creditors, division in a divorce, and frivolous spending. 

It all comes down to “who owns the policy” and “how the proceeds are given”.  Generally, when we see a problem with a death benefit that is exposed unnecessarily to the federal estate tax, we take steps to remove the proceeds from the estate of the insured.  There are a variety of ways to accomplish this and it needs to be done sooner rather than later.  With regard to “how proceeds are given”, we often look at the benefits of leaving such proceeds in a trust for the benefit of a loved one, instead of outright and free of trust.  Leaving these funds in a trust to be held and administered for the benefit of a loved one, can have many benefits: (1) protecting the assets from unnecessary taxes, (2) protecting the assets from division in a divorce, (3) protecting the assets from the claims of creditors, (4) protecting the assets from wasteful spending, (5) controlling distributions to provide security for your loved ones through generations.

            In sum, when planning one’s estate, life insurance needs to be looked at closely.  With proper planning, the results can be astounding.  With improper planning the results can be devastating. 

Contributed by:

Mark F. Winn

Attorney at Law, PLLC