For individuals and families with substantial wealth, estate planning reaches well beyond drafting a will or naming beneficiaries. Learning what role life insurance can play in these plans can help you leave a stronger legacy.
Covering estate tax exposure
Florida does not charge a state estate tax, but federal estate tax still applies when an individual’s total assets exceed the exemption limit, and the tax on the amount above that limit can reach 40%. Portfolios that hold most of their value in real property or business interests can face liquidity problems.
Life insurance can help address this by allowing your heirs to cover the tax liability without selling assets. You can place the policy in an irrevocable life insurance trust so the death benefit remains outside your taxable property.
Timing also plays a role, because when you transfer an existing policy into an irrevocable trust, the IRS applies a three-year lookback rule, meaning the proceeds may still count as part of the taxable estate if death occurs within that period.
Funding agreements to protect business continuity
If you own a closely held business, your estate plan likely includes a buy-sell agreement governing what happens to your ownership interest at death. Without a funding source behind that agreement, the surviving owners or your heirs may struggle to complete the transaction on the terms it outlines.
Life insurance is one of the more common ways to fund these agreements. A policy on each owner’s life can supply the cash needed for remaining owners to purchase the deceased owner’s share without liquidating business assets or taking on debt.
Structuring life insurance to maximize benefits
How you own a life insurance policy and who you name as beneficiary can change its role in your wealth transfer plan entirely. When you own a policy in your own name, its value becomes part of your taxable net worth.
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