New York Estate Planning & Elder Law Blog
Many people realize that life insurance can play a valuable role if someone unexpectedly passes away. What a much smaller group of people is that life insurance can play a critical role in estate planning because it can be utilized to provide liquidity when needed.
With adequate estate planning, insurance proceeds can then be used to pay for things like estate tax. In the hopes that you make the most of life insurance in your estate plan, this article reviews some critical details to remember about utilizing life insurance.
# 1 – Avoid Common Mistakes
Unfortunately, some life insurance strategies can end up jeopardizing your estate plan. Some of the most common life insurance policies that can up jeopardizing your estate include:
- Naming an estate as a beneficiary places the assets at risk of estate tax and creditors. Additionally, your executor will almost certainly be required to handle a larger amount of paperwork than if you name a person as a beneficiary.
- Some people decide to only name one beneficiary, but this is almost certainly a mistake. You should name at least two “backup” beneficiaries to reduce the chances of undesirable situations like the primary beneficiary passing away before the testator.
- Some people make the critical mistake of thinking that estate plans are a “once and done” process. In reality, you should review the terms of your estate plan at least every few years.
# 2 – Why You Should Select Life Insurance
The proceeds of a life insurance policy can do much more than provide a substantial sum to beneficiaries. Some of the other benefits provided by utilizing life insurance as part of your estate planning strategy include:
- Life insurance results in immediate cash at the time of a person’s death to pay for things like funeral expenses
- The cash provided by life insurance proceeds can also be used to pay estate taxes and avoid force sales
- Life insurance proceeds that are payable to a named beneficiary pass income tax free
- Proceeds from a life insurance policy provide low-cost funds that can later be transferred to a trust
- When the insured owns a closely held business, life insurance proceeds can be utilized to buy-out an interest
# 3 – The Role of Irrevocable Life Insurance Trusts
One estate planning strategy involving insurance includes creating an irrevocable life insurance trust to avoid federal estate tax on the proceeds paid at the time of the insured’s death. An irrevocable life insurance involves the owner of the policy transferring it to a trust. Funds are provided for the trust to pay premiums associated with the policy. Because tax benefits in such a situation are substantial, professionals must be involved in creating trusts to make sure that the proper steps are followed.
Obtain the Assistance of an Experienced Estate Planning Attorney
Estate planning can be challenging, but a knowledgeable lawyer can help you navigate this process. As a result, if you or a loved one needs assistance planning for the future, you should not hesitate to contact Ettinger Law Firm.