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Saturday, December 02, 2006


Opinions on life insurance are all over the board. Some thing it is the greatest invention ever, while others are convinced it is a scam purely for the enrichment of life insurance agents and companies and refuse to consider it even when the facts cry out for it.

The truth lies somewhere inbetween. In the estate planning process, life insurance can provide substantial benefits at times, and at other times it is a waste of money and can actually be injurious to overall wealth planning and protection.
In defense of life insurance, here are 9 situations where life insurance can be a boon in the estate planning or family wealth management process:

1. REAL LACK OF LIQUIDITY IN THE CLIENT’S ESTATE. If a client’s assets are all tied up in illiquid assets, such as closely-held businesses, real estate, IRAs or deferred annuities, surviving family members will need the life insurance proceeds to pay estate taxes and for post-death living expenses. While the family can always sell those assets, adverse tax or economic consequences can result. Planning should be undertaken to avoid estate taxes on the insurance proceeds, and in selecting the proper beneficiary.

2. YOUNG COUPLE WITH CHILDREN AND PERHAPS SUBSTANTIAL DEBT. So as to assist in the repayment of debt, payment of education expenses, payment of child care expenses, and to allow for a comfortable existence for the survivor.

3. FUNDS TO REPLACE A VALUABLE EMPLOYEE. Both in your business, or perhaps within the family, such as a caregiver for an elderly family member.

4. PROVIDE CASH FOR A BUY-SELL AGREEMENT. Most co-owners of a business do not want to end up being partners with the spouse or children of a deceased co-owner. Insurance provides cash to buy out the interest of the deceased co-owner, and simultaneously provides funds to live off for the surviving spouse or family members.

5. PROVIDE REPLACEMENT FUNDS FOR CHARITABLE GIFTS MADE AT LIFETIME OR AT DEATH. Oftentimes, if the charitable gift occurs during lifetime, income tax savings can be used to fund the cost of the insurance. This is a win-win - more assets for charity without cost to the family (although the government loses out on tax dollars!).


7. PROVIDING FOR CHILDREN OF A PRIOR MARRIAGE. This type of gift to prior children may be easier to swallow for the surviving spouse since it doesn’t involve the transfer of assets in which the spouse may have developed an emotional or economic investment, especially if he or she does not have a great relationship with the children of the prior marriage. This type of gift also allows for the passage of assets to a spouse to obtain tax benefits (e.g., estate tax marital deduction, deferred IRA or pension plan payout options) while still providing for the children of the prior marriage.

8. TO COVER LIMITED ESTATE TAX EXPOSURE DURING TERM OF YEARS PLANNING DEVICES SUCH AS A QUALIFIED PERSONAL RESIDENCE TRUST OR GRANTOR RETAINED ANNUITY TRUST. These type of trusts provide estate tax benefits only if the grantor survives the term of the trust. To cover the risk of estate taxes for death before the end of the term, insurance can help.

9. A TAX-DEFERRED PRIVATE RETIREMENT POLICY. Value accumulates tax-free in a life insurance policy, similar to an IRA or pension plan. There are also ways to access the funds in the policy without current income taxes. Therefore, a properly structured policy can operate as a persona retirement plan.

Much of the foregoing was adopted from the presentation of L. Howard Payne of Sarasota, Florida for the Florida Bar CLE program "Something Old, Something New... Estate and IRA Planning in the 21st Century."

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