Should You Protect Life Insurance from Estate Taxes?

Should You Protect Life Insurance from Estate Taxes?

The short answer is no. In some cases it is not desired and in others it is wholly unnecessary. Understanding the trade-offs, challenges and how to appropriately evaluate each of the circumstances is essential to understanding what to do. Avoiding potential estate taxation issues of the life insurance is extremely important and is predicated on all incidents of ownership of the policy be held by someone other than the direct owner or the owner’s spouse. In most cases, the ownership of the policy will be held by the adult children or a trust established for the purpose of holding the policy.

Irrevocable Trust

Separating the life insurance policy from the parents adds complexity to the situation. This is often referred to as an irrevocable trust. Some will avoid such complexity and thus not set up a policy whose holder is the children. In the case of holding a policy whose primary purpose is the provide liquidity for the spouse, it is not advisable to add the layer of complexity required to make the children the holders of the life insurance. In this case, the real tax burden will take place upon the second death at which point the tax burden may be much less and therefore not worth pursuing with a complex strategy.

In the event that the unified credits of both spouses were properly maximized, the tax burden of estate taxes may be almost wholly minimized. In some cases, the owners of the estate may wish to transfer the estate tax-free to a charity of their choice. Some argue putting together a complex irrevocable trust may be unnecessary as some suspect the effect estate taxes will continue to fade. Currently U.S. Congress is certainly hinting at decreasing (if you’re a Democrat) or completely eliminating them (if you’re a Republican).

Rapidly paying into a policy can also help to create a tax-deferred account from which the policy holder can borrow against for future business and personal needs including retirement needs. In this instance, the policy holder should be the business owner, not the children.

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Nate Nead
Nate Nead is a licensed investment banker and Principal at Deal Capital Partners, LLC which includes InvestmentBank.com and Crowdfund.co. Nate works works with middle-market corporate clients looking to acquire, sell, divest or raise growth capital from qualified buyers and institutional investors. He is the chief evangelist of the company's growing digital investment banking platform. Reliance Worldwide Investments, LLC a member of FINRA and SIPC and registered with the SEC and MSRB. Nate resides in Seattle, Washington.
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