The Role of Life Insurance in Estate Planning

An attorney can tell you if you should add life insurance to your estate plan

Everyone should have an estate plan that manages assets while you’re alive, controls decision making authority if you are incapacitated, and manages distribution of assets after die. Estate plans differ based on your age, health, lifestyle, who you do (or do not) want as beneficiaries and other factors. Everyone’s life is unique, so estate law attorneys create estate plans tailored to their client’s specific needs.

People with only few assets and no children may only need a very basic will. People with large estates and complicated familial relationships will need a much more complex portfolio of estate planning tools. Generally, most plans include a will, power of attorney, and healthcare directives. But, it’s a good idea to talk to your attorney about how you might benefit from a trust and/or life insurance as well.

Benefits of life insurance

Along with a will, life insurance can provide many benefits that are sometimes overlooked. For example:

  • Funding estate taxes through life insurance. Estate taxes can take a big bite out of your estate. These taxes must be paid within nine months after your death. Proceeds from life insurance can usually be employed quickly to pay tax debt instead of using money in an IRA or other selling assets to pay taxes. Because life insurance payouts are not usually subject to income tax, your beneficiaries can use this money to pay estate taxes without touching other assets
  • Preserving family assets. If you want your business managed by some family members after you die, heirs who will stay involved with the business can use life insurance proceeds to buy out other heirs to promote family harmony and business continuity
  • Covering estate distribution and other expenses. Even with the simplest of estate plans, it can take time before money can be distributed to heirs. In the meantime, money is needed for funeral expenses, bills, taxes and other expenses. Using funds from a life insurance policy can help pay for these expenses without incurring additional tax liabilities.
  • Distributing tax-free benefits to heirs. Life insurance proceeds pass to beneficiaries tax free without having to go through the probate process. This means that money is available sooner.

Along with other estate planning tools, having life insurance provides a way to guarantee a lump sum of money will immediately transfer to your beneficiaries tax free. While it might not mitigate their grief, life insurance can help ensure that financial worries will not add to your family’s sadness

An irrevocable life insurance trust might be a good option for your estate plan

Your attorney may suggest that you set up an irrevocable life insurance trust. As with other trusts, a trustee manages the trust’s assets, investments and distributions. The trustee purchases an insurance policy with you as the insured and the trust as the owner and beneficiary.

This type of trust keeps your life insurance proceeds separate from your estate, which avoids estate taxes. When you die, proceeds from your insurance policy transfer to the trust. Your survivor(s) can receive income from the trust if they have been designated as beneficiaries. An experienced New York estate planning attorney can advise whether you would benefit from including life insurance or an irrevocable life insurance trust in your estate plan.

Reach out to experienced New York estate planning attorneys

The attorneys at Lissner & Lissner LLP can advise you about your estate planning options. Located in midtown Manhattan, we have been helping our clients with elder law and estate law for more than 65 years. We can help you create an estate plan that works for your specific situation. Call (212) 307-1499 or contact us online today for help setting up your estate plan.

Micheal Lissner
About the Author: Michael Lissner
Micheal D. Lissner is an experienced trust and estate planning and administration attorney serving the New York City area. He handles cases ranging from estate planning to trust administration, medicaid planning, elder law, and representation of survivors of the Holocaust and their heirs