New York Estate Planning & Elder Law Blog
For people who are estate planning and have one of their goals as providing for their grandchildren’s education, training, future home, or the like there are many assets that can be suited for that goal. However, there is one asset that does not often come to mind that can cover the expenses of future generations that most elderly couples already possess: life insurance.
Whole Life Insurance
Whole life insurance is a type of insurance that is designed to protect a person over their entire lifetime. Typically, an insured person pays a fixed periodic premium on the insurance, and a death benefit is provided to a named beneficiary when the insured dies. The policy builds in value over the lifetime of the insured as premiums are paid, and if at any time the insured person wishes to terminate the policy, the cash value is surrendered to them.
Most couples purchase life insurance to provide the other spouse with survivor income when the other passes away. These insurance policies come in most handy when the couple is younger because the survivor income supplants the wages that the deceased spouse would have made. However, once a couple reaches retirement age, whole life insurance is not as necessary if the proper planning has been accomplished.
Options for the Insurance
If an older couple wishes to get rid of their life insurance policy, one option is to surrender the policy and reinvest the cash value into other assets. For a couple looking to provide for their grandchildren, the cash value can be placed in an account for their use or to be gifted to them in the future. However, the tax implications of this plan would mean that the policy gets taxed as ordinary income upon surrender and would be reduced in value for the heirs.
Another option instead of surrendering the insurance is to gift the entire policy to fund an irrevocable trust created to benefit the grandchildren. The policy would then be outside of the estate, free from income and estate taxes. In addition, the life insurance policy would be considered “paid up,” meaning that there is no need to gift more money to the trust to pay the premiums. Any annual dividends paid by the policy can be used to purchase additional insurance, thus increasing the trust’s value.
Irrevocable Insurance Trust
An estate planning attorney can easily establish an irrevocable trust for the insurance policy. In order to gift the insurance, the trust should be named as the owner and beneficiary of the policy. In this way, the trust can be used to benefit grandchildren regardless of whether the owner of the policy has passed away. For example, if a grandchild needs money for college tuition and the insured is still alive, the cash value from the policy can be tapped from the trust. If the insured has passed away, the death benefits can be used to pay for tuition.