Life insurance can serve as a strategic tool for clients to potentially reduce estate taxes, particularly as provisions of the 2017 Tax Cuts and Jobs Act are set to expire. Wealthy clients facing the prospect of reduced estate tax exemptions may turn to life insurance policies to mitigate tax burdens and preserve assets for beneficiaries.
Setting up a life insurance policy within a specially created trust can allow for the use of policy proceeds to pay federal estate taxes, thus avoiding the need to liquidate assets. Moreover, establishing an Irrevocable Life Insurance Trust (ILIT) can exclude life insurance proceeds from the taxable estate, ensuring beneficiaries receive them tax-free.
With the looming possibility of a significant reduction in the federal estate tax exclusion, ILITs offer a strategic way to shield life insurance proceeds from estate taxes. These trusts, typically funded through annual gifts to cover insurance premiums, require careful planning and administration.
Additionally, financing life insurance premiums through banks or premium financing companies has become popular, providing policy owners with liquidity while preserving other assets. While this strategy can offer benefits, it requires careful consideration and may limit flexibility and control over the estate plan.
Ultimately, the use of life insurance and ILITs can be effective strategies for estate planning, but they necessitate precise setup and ongoing management to ensure desired outcomes and tax efficiency.
Resource: Jeff Stimpson, April 15, 2024: Using Life Insurance To Address Anticipated Rise In Estate Taxes
