No matter your net worth, life insurance is an excellent estate planning tool. For clients with low solvency, life insurance provides a safety net and a little something to pass on to survivors. It ensures that if your time comes sooner rather than later, you will be able to take care of the loved ones you leave behind. Clients with a very high net worth find life insurance useful because it provides a lump sum of cash upon death. It is typical for those clients to have a lot of tangible and real property, but little cash on hand. This means that upon the death of the individual, some of those assets must be sold quickly in order to provide cash to pay estate taxes, executor fees, and other administration fees.
In either case, life insurance is shielded from creditors. This means that even if you die with $500K of debt, your $500K life insurance will jump those creditors and land in the pockets of your loved ones. An estate planning attorney will explain the importance of making your life insurance payable to a person rather than the estate. Making life insurance payable to the estate could open it up to attack by the creditors.
Life insurance will always pass income tax-free and can pass estate tax-free depending on how you set it up. For example, one way to avoid estate taxes is to give away all incidents of ownership during your lifetime. This means that although you continue to pay the premiums, you do not have any control to change the beneficiary, or how the insurance is paid out. You give up all rights to control the policy. Upon your death, it will not be treated as your property and thus, will not be subject to your estate’s taxes.
The bottom line is that this insurance policy will 1) avoid creditors; 2) Avoid income taxes (and possibly estate taxes); 3) Avoid probate; 4) allow you to retain control (but then it is subject to estate tax); and 5) provide cash to administer your estate and pay taxes. A good estate plan will almost always incorporate some form of life insurance into the mix. If your estate planning attorney in salt lake city has not set up a life insurance plan, you should ask why.