The Benefits of Life Insurance
The benefit of life insurance is evident. If you pass away, your beneficiary will receive money. How much money they receive depends on the size of the policy and how much money you put in. For estates with a net value less than $4 million, a life insurance policy would effectively be tax-free, as it would not be subject to either a federal or Illinois estate tax. Also, a beneficiary does not have to pay income tax on life insurance proceeds.
For estates that are asset heavy, but low on assets with liquidity, life insurance proceeds benefit the estate by creating a quick influx of cash to pay urgent expenses, to pay creditors, and to settle any imminent tax obligations. This gives needed flexibility to the executor, who is not forced to sell off other assets.
Life Insurance Trusts
If your estate has a value greater than $4 million, it may be worth your while to explore your life insurance options. This is because life insurance proceeds are subject to estate taxes. This means that the life insurance proceeds in estates greater than $4 million will be subject to Illinois state estate tax, while the proceeds in estates greater than $5.49 million will be subject to Federal estate taxes. One option that would exempt your life insurance policy from being taxed as part of your estate is to transfer ownership of the policy to the beneficiary. There are strict rules for divesting a life insurance policy that an attorney can guide you through.
One method of transferring life insurance ownership involves establishing a Life Insurance Trust. This is a trust that you establish in life, and you name a trustee to oversee the trust. The trustee subsequently purchases a life insurance policy in which you are the subject of the policy. The beneficiary of the insurance policy is the trust. When you pass away, the trustee will use the proceeds as you have instructed. This may include payments to your beneficiaries, or it may be used to pay expenses related to the administration of the estate. The primary benefit of this trust is that the insurance proceeds are not subject to the estate tax.
Ways that Life Insurance is Misused
There are times that a life insurance policy exists, but that it is not properly utilized in accordance with the rest of your estate plan. This is generally when a policy exists, but has been neglected over time. How does one neglect a life insurance policy? One common way is by failing to update the beneficiary and keeping a former spouse on the policy instead of the current one. In addition, people lock into policies that may be outdated and not reflect market interest rates, administrative fees, or benefits.
Let the Law Offices of Robert S. Thomas help plan your estate. We are a team of skillful professionals who will provide a complete and comprehensive review of your assets. We will make sure to create a plan that will meet your goals, account for every tax advantage, and withstand legal challenges. Call us today at 847-392-5893 to set up an appointment, or visit our website to contact us.