INSURANCE - A Major Estate Planning Tool
Insurance is at the bedrock of estate planning. First,
it reduces the risk of your estate getting wiped out
by unforeseen events. Second, it has unique characteristics
that, if used, can prevent an estate tax wipe out.
Estate planning is all about making sure things are
taken care of. Insurance is part of that process. Here
are various different kinds of insurance, and why you
should consider having them:
INSURANCE ON YOU:
Life insurance pays a death benefit to your beneficiary.
This is an essential insurance for someone who has responsibilities,
such as a family, but has not yet built resources sufficient
to cover those responsibilities in the event of a premature
death. Disability insurance provides income to you in
the event you can no longer work. Health insurance pays
for medically necessary procedures and medications for
you.
INSURANCE FOR YOUR HOME:
Homeowner’s insurance covers the risk of fire
or other damage to your residence. It also covers the
contents of your home and liability to third parties
who are injured in your home. A Renter’s policy
covers only the contents and injuries. Typically, earthquakes
and floods are risks that are not covered and require
separate policies for protection. Title insurance protects
you against the possibility of someone claiming that
your home is actually theirs.
OTHER INSURANCE:
Auto, boat, and other insurance protect both the property
and/or any liability that arises from your use of that
property. Professional liability insurance protects
your family against innocent mistakes made in your career.
Umbrella coverage goes on top of the other coverages,
and is a very cost effective form of asset protection.
If you have a $1 million umbrella and are in an auto
accident, the claim would first go through your auto
coverage (let’s assume $250,000) and then your
umbrella. Umbrella coverage also covers negligence for
actions you take unrelated to your home, auto, etc.
These coverages are important to preserve what you
have built by protecting against losses from the destruction
of the property and from liability that may arise from
their use or ownership.
PLANNING THROUGH INSURANCE:
Life insurance can also be an excellent asset for use
in estate planning because it has little value during
your lifetime and then has great value at your death.
Having little value during your life makes it easier
for you to part with before your death.
Assume you would like to leave a legacy of $5 million
to your descendants. You would owe $1 million in estate
taxes at your death if you died owning $5 million. Passing
this wealth on without incurring taxes is highly desirable,
but to achieve that goal means some loss of control
and sacrifice while you are still alive. Few want to
part with their wealth before they die. Your estate
would owe this tax even if the only asset you owned
at your death was a $5 million life insurance policy.
There is a relatively easy way to avoid estate tax on
the value that you leave to your heirs through life
insurance.
Let’s assume you have $5 million in assets. If
you used part of your estate to purchase a $2 million
life insurance policy, you might pay $20,000 per year
in premiums. If you are willing to irrevocably part
with the $20,000 each year, then set up an irrevocable
trust and have the trust buy the policy. Because the
trust owns the policy and not you, the death benefit
will be free from taxation at your death. The only taxable
transfers to the trust would be the contributions for
the premiums. However, with proper planning, even those
premiums could be gift tax free. Life insurance trusts
are a simple way to leave a legacy to the next generation
estate tax-free. In the trust, you can also set forth
specific distribution terms and conditions, which would
not be possible with an outright gift.
Good timing and planning can make a great difference
for your loved ones, and provide peace of mind for you.
By Michelle H. Tucker
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