Most people think of life insurance as just a payout after someone dies. It can be, but life insurance can also be an integral part of your estate plan as well.
Of course, a life insurance policy can offer loved ones some financial stability after death, but you can also maximize the value of a policy with different planning tools as well. Here are some of the possibilities.
What Life Insurance Can Do Immediately
While life insurance is usually considered to be to help a surviving spouse with children, there are a number of ways a payout can be used right away:
- Provide cash immediately to cover funeral expenses, debts, and final income taxes
- The cash can also be used to cover any estate taxes to avoid a forced sale of any assets
- Proceeds can be used to purchase the buy-out of the deceased’s interest in a closely held business
- Funds can be transferred into a previously created trust in the deceased’s will for the benefit of minor children, disabled or elderly relatives
Funding Irrevocable Trusts With Life Insurance
If the surviving spouse and other beneficiaries are able to cover the deceased’s expenses, they can transfer the money into an irrevocable trust. Putting the policy in the name of an irrevocable trust means that the proceeds can also be payable to someone besides the insured’s estate and avoid the pass through probate, and the funds used to settle other financial obligations that the deceased may have had, such as child support or alimony.
An irrevocable trust also has the distinct advantage of significant tax benefits. Because these trusts can be complicated, it’s best to work with an Illinois estate planning attorney to ensure that everything is completed correctly.
The policy’s owner transfers it into the trust, or the trustee purchases the policy. Unless the policy is already paid, funds in the trust are used to pay the premiums. It’s important to ensure that the trust has the funds to pay for the premiums, and the insured can make regular gifts to the trust to cover the payments.
The policy’s owner must survive for at least three years after the transfer to avoid having the policy added into the insured’s estate, and therefore, go through the probate process.
It’s important to ensure that there are no “incidents of ownership” in the policy that can connect the insured to the policy, such as the right to change beneficiaries or modifying the terms of the trust.
It’s also important to make sure that the insurance company is notified of the ownership change on an existing policy. If new policies are purchased for the purpose of funding a trust, everything must be in the trust’s name, and not in the insured’s name. The insured must hold absolutely no interest in the policy.
What About A Revocable Trust?
If you’re not completely comfortable with the idea of adding into an irrevocable trust, a revocable trust is also an option. Unfortunately, you’ll lose the tax benefits that come with an irrevocable trust. However, you will still have many of the benefits of a revocable trust, such as caring for minor children, disabled and/or elderly relatives who will lose their support without it.
Let Provenza Law Help With Life Insurance And Estate Planning
Considering adding life insurance to your estate planning? Provenza Law can help. We understand Chicago estate planning, how to design the best estate plan for you, your family and your needs. James C. Provenza is an Illinois estate planning attorney with more than 25 years of estate planning experience. Call our firm today at (847) 729-3939, or use our online contact form.
