Life insurance is typically a critical element of a family’s estate plan. It may enhance the

amount of wealth you can bequeath to your heirs and provide a ready source of cash for post-death financial obligations. If the value of your estate exceeds the federal estate tax threshold (for 2013, this amount is $5.25 million), this source of liquidity may reduce the likelihood that your heirs will be forced to sell assets to pay estate taxes.

When you designate an individual as beneficiary, life insurance proceeds are paid directly to the beneficiary and are not subject to probate proceedings. The beneficiary has quick access to a source of funds that may be used for costs associated with settling your estate, such as lawyers’ fees.

If the policy is payable to your estate instead, the proceeds are subject to probate the same as any other asset.

Because the probate process for a complicated estate may take up to a year or longer, your heirs may have to wait a long time before accessing the proceeds.

Proceeds from life insurance that are received by the beneficiaries upon the death of the insured are generally income tax free.


Transferring ownership of a life insurance policy entails a trade-off between control and taxes. Once you transfer ownership to another person, you relinquish control of the policy.

If, for example, the new owner cashes in the policy before your death, you have no recourse. Although the new owner is obligated to pay premiums that may be due following the transfer, you can periodically gift funds to be used as premium payments.

Another technique for transferring ownership is creating an irrevocable life insurance trust (ILIT) that holds the policy. A trust enables you to stipulate that the policy be kept in effect for as long as you live. You designate a trustee who, upon your death, distributes the insurance proceeds to your heirs. Insurance proceeds may be excludable from the surviving spouse’s estate upon their death, depending on the terms of the trust and/or the type of life insurance policy. The spouse may be the life income beneficiary, but may not have any right to or power over trust principal, except per the discretion of the trustees. The transfer of an insurance policy, other than a term policy, may have tax implications. The client should discuss any such transfer with his or her tax advisor.


An important decision with regard to insurance in estate planning is who should own the policy. The following are some advantages and disadvantages of various ownership scenarios.

Spouse: If the spouse of the insured owns the policy, the replacement cost of the policy would be included in the estate of the spouse; and if the spouse dies before the insured, it’s possible that the policy might revert to the insured and be included in his or her estate.

Children: If the children of the insured own the policy, the advantage is that the death benefit would be included in the children’s estate, not the parents’. Note that if the children are minors, it would require the appointment of legal guardians before ownership could be established or benefits paid.

Revocable Trust: In a revocable trust, the insured can still control the policy and the death proceeds are shielded from potential creditors of the insured. But, because the insured has an incident of ownership through the trust, the death benefit is includable in the insured’s gross estate and could be accessible to the estate’s creditors.

Irrevocable Trust: If the policy is owned by an irrevocable trust, there is no inclusion in the gross estate. The downside is that the insured does not retain any control over the policy and cannot revoke the trust.


Many families also use life insurance proceeds as a tool for managing an estate that includes ownership of a business. For example, an entrepreneur may find himself in the situation in which his two adult children—one who works in his business and one who does not—are his heirs. Many entrepreneurs in this situation will bequeath the business to the son or daughter who works there, and designate the other as beneficiary of a life insurance policy whose value equals that of the business.

Many business owners rely on life insurance proceeds as part of a business continuation agreement that enables business partners to acquire the ownership interest of a deceased owner’s heirs. In this instance, the surviving owners use insurance proceeds to purchase the interest of heirs who have no intention of managing the business.

Estate and insurance planning are complex areas that require assistance from experienced professionals. Let me help you be better positioned to realize an efficient transfer of wealth for your heirs.


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