When advisors work with married clients on estate planning, the product of choice is often a survivorship life insurance policy. The contract offers coverage on both lives at a lower cost than owning two separate policies.

And if estate taxes are the reason for the planning, survivorship policies pay the proceeds when they are needed–at the death of the second individual. However, a single life policy lends itself to other estate planning situations of married clients.

Paying estate taxes at the first death

Suppose your clients’ estate plan calls for the payment of estate taxes upon the death of the first spouse because this is the most cost-efficient tactic. Using this strategy, your clients will create two trusts for the distribution of their estate: A family trust and a marital exemption trust.

Instead of funding the family trust with only the maximum allowable estate tax credit ($2 million in 2007), the will provides that any residual estate assets above the estate tax exemption goes to the family trust, too. The estate pays estate taxes due on assets in the family trust over the exemption amount. Additionally, the trustee may be able to leverage the family trust’s assets by purchasing a life insurance policy on the surviving spouse to generate an even larger inheritance for heirs.

Paying estate taxes on the death of the first spouse is not discussed routinely in estate planning but can be advantageous to couples with specific goals. Spouses may use this tactic, for example, to remove a high growth asset from their estate as soon as possible. If this asset is transferred to heirs in a family trust at the first death, then the surviving spouse will not have the high growth asset in his or her estate.

A smaller estate tax bill may result for the surviving spouse, depending on how long he or she lives. Because it is not known which spouse will die first, the strategy requires two single life policies, one on each spouse.

The technique in action

To illustrate this planning technique, assume your clients have a $4 million estate. The husband is the sole owner of a fast growing business valued at $3 million. His daughter is engrossed in the business with him and would like to take it over.

The father has no intention of transferring ownership during his lifetime–he wants to work until he dies. If the couple transfers the business to the daughter at the death of the father, then the growth of the business will occur in the next generation.

The wife has not been involved in the business so there is no need for her to retain ownership. This strategy gives the business to the person who is keeping it going.

If the business were retained by the spouse, it would continue to grow in value and potentially create an even larger estate tax bill in the future. Transferring the business at the death of the father can solve this problem. However, if the daughter chooses to purchase the business from the father’s estate, rather than just inherit it at no cost, she can buy a life insurance policy on the father and use the proceeds to pay the estate for the business.

If the daughter does not purchase the business from the estate, but instead inherits it, the surviving spouse can use the remaining $1 million to live on in retirement. A life insurance policy provides resources to pay the estate taxes due from the business being included in the husband’s estate.

If needed, another life policy on the husband may be purchased to provide sufficient assets for the surviving spouse to live on during retirement.

Second marriages

Couples who are on their second marriage may have to factor other issues into their estate planning. Besides child support and the division of property, couples may also have to consider custody and inheritance issues with respect to children from a previous marriage.

When planning with a couple on their second marriage, planners may use a qualified terminable interest trust. A trust that meets the QTIP requirements provides the surviving spouse with a right to the trust’s income for his or her lifetime, paid at least annually, but does not afford the surviving spouse the ability to name a beneficiary of the trust’s principal. This is a great benefit because it allows the deceased spouse to provide income to a surviving spouse, but also guarantees that the property will ultimately pass to the children. A QTIP may not be a workable solution if the surviving spouse is similar in age to the children. If the surviving spouse lives as long or nearly as long as the children, then there may be little left for the kids.

If this situation arises, a single life insurance policy can be used to provide an inheritance for the new spouse so that other assets, such as a family-run business, do not need to be liquidated to provide for the spouse. Additionally, a single life policy could be used to provide an inheritance to children so that an equal inheritance is provided to all the children, whether the child is from a first or second marriage.

There still may be a need for a survivorship policy if the estate from a second marriage creates an estate tax liability. However, a single life policy is also useful because of the many special planning needs involved with blended families.

In today’s planning world, clients need to create a tailored estate plan to meet their planning objectives. Not every plan will follow the same path of deferring estate taxes until the second spouse’s death. Additionally, other estate planning needs arise that require funds sooner rather than later. For those couples or individuals that have different planning needs, single life policies provide the liquidity and resources required to make their estate plans a success.

Thomas J. Fridrich, JD, CLU, ChFC, CLTC, is an advanced markets specialist focusing on retirement planning and charitable giving at Mutual of Omaha, Omaha, Neb. He can be reached at .