Using life insurance as part of your estate planning

In addition to serving as a tax shelter for you and your survivors, life insurance can also be an important part of estate planning — that is, dealing with how to distribute your wealth after you die.
Currently, the federal tax laws state that the first $650,000 in inheritance is federally tax-exempt (that amount increases over the next few years). Most states allow the same amount or they have no inheritance tax at all. Realistically, most people don’t need to worry much about taxes eating away their estate. Furthermore, most couples own their property and assets jointly, so surviving spouses or owners don’t have to pay inheritance taxes, even if the estate is greater than the amount allowed under the law.
But if your estate is worth more than the law allows, how doyou ensure that your wealth goes to your survivors and not to the government? That’s where life insurance and life insurance trusts come in.
To do this sort of estate planning, consult an expert who can both counsel you and set up the appropriate vehicles. Briefly, here’s how it works:

• You set up an irrevocable life insurance trust, to which you contribute annually. The trust is, in effect, a life insurance policy, which goes to your children or survivors taxfree. You can’t withdraw that money for any reason (hence the term irrevocable).
• You and your spouse each leave to your children whatever the law allows at the time, so that money is also taxfree.
• You will the remaining amount to a qualified charity of your choice, which, by definition, is exempt from inheritance taxes. If you don’t will the remaining amount to a charity, it is considered part of your estate, and your heirs have to pay taxes on it.

In this situation, you take the IRS out of this picture. Using some of your estate, you buy a tax-free life insurance policy so that your heirs get the same amount they would have before any estate taxes — the amount equivalent to your estate. Plus, you donate a large portion of your estate to a charity rather than to the government. The only party that loses is the IRS (and another party wins — the life insurance company, which charges you a significant amount for that policy over a period of years). But your heirs lose nothing! Isn’t that the goal of estate planning?
Don’t try to wade through this complicated process by yourself. A qualified professional can help you sort through the fine details and prevent you from making a costly mistake.