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Your clients already understand the value of having a life insurance policy. Protecting loved ones from financial instability or insecurity is a powerful tool, which is why so many people get insured. However, for those clients with a size-able estate, how will life insurance come into play? 

Today we want to discuss life insurance and estate planning so that your clients are prepared for this eventuality. Understanding the various elements ensures that you can direct them to make the best decision for themselves and their loved ones. 

Estate Taxes

The recent Tax Cuts and Jobs Act of 2017 raised the estate tax by a considerable amount. That number is now $11.4 million. Spouses can also combine their worth, meaning that a child can receive up to $22.8 million before any taxes are taken out. Estates exceeding this amount are taxed at 40 percent. 

That being said, states can have a lower taxable amount, so your clients must understand those as well. For example, in New Jersey, the maximum allowed is just $675,000. 

Life Insurance and Estate Taxes

Here are a few scenarios to help understand how life insurance can impact estate taxes.

  • Death Benefit to a Spouse: As a rule, any amount of assets can be transferred between spouses without incurring any taxes. So, if a client names a spouse as the beneficiary, he or she doesn’t have to worry. 
  • Death Benefit to a Child: If your client is the owner and insured of the policy, with a child as the death benefit beneficiary, that money could be subject to taxes if it exceeds $11.4 million (or $22.8 million for married couples). 
  • Transfer of Ownership: estate planningIf the policyholder transfers ownership to another person, then the money will be paid tax-free. There are a few qualifications for this transfer. First, the value of the policy is considered a gift, which could make it taxable. Currently, an individual can give up to $15,000 in a calendar year without paying taxes. If the policy is worth more than that, the overage can count toward the $11.4 million lifetime exemption. Second, the current owner of the policy has to survive the transfer by at least three years. If he or she dies within that time frame, the transfer becomes null and void, which means that the money could still be subject to estate taxes.
  • Using a Trust: Finally, clients can create an irrevocable trust to manage their life insurance benefits. In this case, the trust is both the owner and beneficiary of the policy. This way, the funds exist outside of the estate and are not subject to taxes. The additional benefit of a trust is that one can name a trustee to manage the money. This way, funds can be dispersed as the policyholder sees fit. For example, the trust could pay beneficiaries (i.e., children) in installments, rather than a lump sum. 

Contact Advisor’s Resource Today 

Incorporating life insurance as part of estate planning is a crucial step for your clients. Let us assist you in helping them make the right decision. Talk to one of our experienced agents today. 

Jordan Pence
Post by Jordan Pence
October 31, 2019