If you are like most people, you have precise wishes as to who should inherit from your estate once you pass away. Unfortunately, it is sometimes true that hard-earned wealth accumulated during one’s lifetime could be confiscated and disbursed in unintended ways. Following death, your estate has the responsibility of paying off any outstanding debts owed. This can include liability for taxes, creditors, and pending court proceedings. Equipping yourself with proper life insurance coverage can help protect your wealth and ensure that the maximum amount possible is passed on to your intended recipients.
What is Life Insurance?
Life insurance is a contract between the insurance company and a policyholder. Upon payment, the insurance company agrees to disburse a sum of money to designated recipients when the policyholder passes away. When purchasing a life insurance plan, the policyholder makes payments called “premiums” to the insurance provider. The amount of the premium is based on factors like age and amount of coverage required.
There are various types of life insurance policies. Simply put, “term” life insurance is a pure insurance policy (like your auto or homeowner’s policy). If you die during the term of the policy (10 years, 20 years, etc.) the insurance company will pay the agreed-upon “death benefit” to the policy beneficiaries, if you don’t die during that term they simply keep the premiums and the policy premiums either increase or the policy terminates altogether. Other policies maintain a “cash value” in parallel with the insurance component. The premiums paid above and beyond the pure insurance build the cash value, which is normally invested and can be used to provide an income tax favorable fund which can be accessed by the owner or can be used in the future to pay policy premiums and mitigate some of the policy cost.
Forming an irrevocable life insurance trust (“ILIT”) can be a helpful vehicle for holding insurance policies and disbursing life insurance proceeds because it allows the insured to have specific control over how the money will be used. It can also provide significant estate tax advantages as well as valuable asset protection for the beneficiaries.
What are the Benefits?
In addition to the policy proceeds typically being income tax-free, life insurance policy owners in New York enjoy the peace of mind that the proceeds should also benefit the intended recipients and not be subject to outside claims. In addition, a policy held by an ILIT generally will not be reached by creditors of the decedent. It can typically pass to the intended beneficiaries free of costly federal and state estate taxes as well. Furthermore, these insurance trusts can incorporate provisions that are intended to keep the proceeds safe from the beneficiaries’ spouses and/or creditors.
Because life insurance can have such a significant effect on maximizing the amount of your wealth available to your intended beneficiaries, it is essential to have a team of professionals guide you through the process to make sure everything is set up correctly. Your financial advisor should be able to provide you with a detailed understanding of your policy and why it is the appropriate type of policy for your needs. Additionally, he/she should be working in coordination with your estate planning attorney and accountant to ensure that your insurance is implemented in the most efficient way possible and consistent with the rest of your financial and estate plan.
Chaves Perlowitz Luftig LLP is one of the most highly regarded real estate and estate planning firms in New York City. Our team of top-rated real estate attorneys and estate planning lawyers have extensive knowledge, resources, and connections to help you achieve your goals and plan for the future.