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Using Life Insurance for Estate Planning


by Peggy Hollander

Life insurance is a versatile tool for estate planning. It can create a pool of money that may be used to fulfill an individual’s personal objectives and goals. It may increase the funds conveyed to children or grandchildren, add to a bequest or pay potential estate taxes. Life insurance may even play a role in business transactions, real estate purchases and succession planning, such as selling a law firm to younger partners.
With the exception of tax and estate planning attorneys, South Florida professionals may not be aware of the variety of ways life insurance can be used in estate planning. Here are some examples.

Selling a Practice

If you sell your practice, most likely you may receive cash, stock or a combination for your interest in the partnership or corporation. Therefore, it is important to consider the implications of this transaction in your retirement and estate planning. For instance, you might select to gift some of the assets you receive from the sale in trust for your children, effectively transferring wealth to a new generation. Yet if the sale occurs on the death of the partner or shareholder, life insurance death benefit proceeds can be used to fund the amount needed for the spouse or heirs.    

Getting a Divorce

If a husband and wife are in the divorce process, one of the considerations is the untangling of the combined estate plans, including life insurance. However, this will magnify the challenge and must be addressed if there is an irrevocable life insurance trust. In addition, life insurance may guarantee part of the settlement agreement, helping to assure future payments to the spouse for alimony or child support.

Passing Assets in Blended Families

Estate planning can be more challenging in blended families, where there may be children from prior marriages. One or both spouses can use life insurance to make bequests to those children, providing more options when passing assets to the next generation.

Protecting same-sex Partners

Because same-sex partners may not have the same legal rights — or the unlimited marital exemption — enjoyed by married couples, life insurance is an important part of the estate planning process. Policy proceeds can be used to provide liquidity for estate taxes, cover the accrued equity in a common residence, or fund a lifetime stream of income for the surviving partner.

Replenishing a Private Foundation

A family foundation may be the owner and named the beneficiary of a life insurance  policy as a means for replenishing some funding on the death of the founder.

Leaving a Legacy

Life insurance can be a very effective instrument for leaving a legacy. By naming a charitable organization as the beneficiary of your policy, you may provide leverage for your funds to provide a larger donation that can add to its endowment — an important consideration in today’s challenging economy.

Preserving an Art Collection

If you are a dedicated art collector, you may want your collection to remain in the family. Life insurance proceeds may be used to pay the estate taxes, so your heirs maintain the integrity of the collection. If you plan to give your works to a museum or charity, life insurance can be used to fund an endowment for the preservation of your collection.
Whatever your personal goals, life insurance can be an important part of the estate planning process, providing financial support and liquidity to your heirs at a difficult time in their lives.

Peggy Hollander is managing partner of The Succession Group in Coral Gables.  She offers securities through AXA Advisors, LLC (NY, NY 212-314-4600), member FINRA, SIPC and offers annuity and insurance products through AXA Network, LLC and its insurance agency subsidiaries.  The Succession Group is not owned or operated by AXA Advisors or AXA Network.  The Succession Group, AXA Advisors, and AXA Network do not provide tax or legal advice.  You consult your own tax and legal advisors regarding your particular circumstances.  GE-65123(09/11)

This article is not intended as legal or tax advice. Accordingly, any tax information provided in this article is not intended or written to be used, and cannot be used, by any taxpayer for the purpose of avoiding penalties that may be imposed on the taxpayer. The tax information was written to support the promotion or marketing of the transaction(s) or matter(s) addressed and you should seek advice based on your particular circumstances from an independent tax advisor.
All guarantees provided by life insurance are subject to the claims-paying ability of the issuing carrier. Life insurance is subject to exclusions, limitations and terms for keeping it in force. Policy loans and withdrawals from a permanent life insurance policy reduce the policy’s cash value and death benefit and increase the chance that the policy may lapse. If the policy lapses, terminates, is surrendered or becomes a modified endowment, the loan balance at such time would generally be viewed as distributed and taxable under the general rules for distributions of policy cash values. You should discuss your individual circumstances with a licensed insurance professional to determine which life insurance policy may be suitable and appropriate for you.

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