Benefits of Including Life Insurance in Your Estate Plan

Few people think of life insurance as part of an estate plan, but many of our clients would benefit from buying a policy. Life insurance also has many attractive tax features and can ensure that your loved ones are provided for in the event you die.

At Millhorn Elder Law Planning Group, our estate planning lawyers in The Villages help residents preserve assets and pass them on to the next generation. Contact us to start drafting a comprehensive estate plan.

Your Beneficiaries Owe No Income Taxes on the Death Benefit

Under IRS regulations, death benefits payable to a beneficiary do not have to be reported as income in most cases. This is a terrific benefit of life insurance. Taxes can take a big bite out of any assets your loved ones inherit, and doing anything that lowers their overall tax burden is essential. If you leave them a home or other investment, then they likely will pay capital gains taxes.

Of course, the life insurance will be included in the estate for estate tax purposes if the deceased owned the policy at death. But few people have estates large enough that beneficiaries will pay this tax.

Life Insurance Does Not Pass Through Probate (Usually)

Another attractive feature of life insurance is that it does not go through probate the way other assets do. Instead, you name your beneficiaries on the policy, and they receive payment. If you want to change who receives your benefits, then you change the beneficiary by contacting the insurance company.

Because death benefits do not pass through probate, your family can often receive badly-needed income much faster. Probate of a complex estate could take well over a year, but life insurance can provide immediate income support.

A life insurance policy will need to be probated only if the estate is listed as the beneficiary. There are some situations clients prefer this route. However, we can work with clients to draft a comprehensive estate plan where it is not necessary.

Life Insurance Can Pay Certain Taxes or Expenses

Instead of using life insurance to provide income for loved ones, some of our high net-worth clients use life insurance policies to pay expected taxes or other estate expenses, including funeral and burial costs. Your surviving loved ones will be grateful that there is a pool of money to pay these expenses, which increases the overall value of the estate.

Business Owners Should Consider Life Insurance

You might own a small business with other people and want to avoid having someone inherit an ownership stake. A spouse or child of an owner might not know anything about the business and could be more of an impediment to the entity’s survival. You can prevent this by including a buy-sell agreement and funding it with life insurance.

It works like this. The agreement states that when an owner dies, his or her shares will be bought by either the business or the surviving owners. The owners then take out life insurance policies on each other. This way, when an owner dies, funds are immediately available to purchase the deceased’s interest in the business.

Obtain Peace of Mind

If you do not yet have an estate plan, now is the time to work with an experienced attorney to craft one. Contact Millhorn today to schedule a free consultation.

Resource:

irs.gov/faqs/interest-dividends-other-types-of-income/life-insurance-disability-insurance-proceeds/life-insurance-disability-insurance-proceeds

https://www.millhorn.com/waiver-on-required-minimum-distributions-for-2020/