ST. PETERSBURG, FLA.–Why is life insurance valuable as a source of liquidity? How can a policy enhance the value of an estate, stabilize a business interest or mitigate the impact of income tax rates? What role can death proceeds play in maximizing IRA plan distributions and Roth conversions?
These questions, among others, were addressed during a workshop at LIMRA International’s Advanced Sales Forum, held here Aug. 12-14. The session, “Sizzling Uses of Life Insurance in Estate Planning,” brought together a panel of advanced sales experts from Prudential Financial, Mutual Trust Financial Group and Allianz Life Financial Services.
Terri Getman, a holder of the Chartered Financial Consultant designation and vice president of advanced marketing at Prudential Financial, Newark, N.J., kicked off the panel discussion by talking about life insurance’s role in replacing income. The vehicle can be used to replace the income of a deceased young wage earner or an individual who is asset-rich but income-poor via an income-only trust, she said.
Life insurance proceeds can also be used to retire debts, pay for services formerly provided by a deceased (such as house-cleaning, child care and cooking), fund a child’s college education or satisfy the care of individuals with special needs, said Getman.
Life insurance can also provide a source of liquidity to help pay federal and state taxes and other final costs. In a typical situation involving a large estate, a married couple establishes a family trust sheltered by the $3.5 million per individual estate tax exemption ($7 million per couple), the balance of property passing to a U.S. citizen spouse under the unlimited marital deduction. said Getman.
“This delays the federal estate tax until the death of the surviving spouse,” said Getman. “To pay the estate tax, the couple can fund a second-to-die life insurance policy residing inside an irrevocable life insurance trust or, alternatively, a stand-by survivorship trust or a ‘B’ trust.”
Life insurance proceeds can help address the marital deduction limitations of a non-citizen spouse, Getman added. For this individual to qualify for the unlimited marital deduction, property must pass into a qualified domestic trust. However, distributions of principal from the trust are subject to estate tax, except in hardship cases. And assets remaining in the QDT at the death of the non-citizen spouse do not qualify for the estate tax exemption.
Getman, noted, too, that life insurance can boost the size of an insured’s estate, thereby tempering potential family conflicts. The death proceeds may be used to provide funds for children from a prior marriage, for example, meet the requirements of a divorce decree (such as a child support), pay for a business interest or equalize the inheritances of heirs who do not work in a family business.
As to stabilizing a business, Rakesh Bedi, a holder of the Certified Financial Planner designation and director of advanced sales and sales support at Mutual Trust Financial Group, Oak Brook, Ill., observed that a policy’s death proceeds may be used to satisfy business debts, provide needed cash flow following the death of a key employee and create a bonus fund to retain key employees during a transition period of the business.
A high cash value life policy owned by a complex trust can help mitigate the impact of compressed trust income tax rates, which run as high as 35% on taxable income exceeding $11,150 annually, he added. That’s because the cash value grows tax-deferred. And, at the death of the insured, proceeds pass income tax-free to policy beneficiaries.
Bedi observed also that policy death proceeds can increase the efficiency of assets, such as an individual’s applicable estate and gift tax exclusion amounts or a generation-skipping transfer tax exemption amount.
“Using a low premium whole life policy, an individual who is 60 years of age can secure a death benefit that’s many multiples of the annual premiums,” said Bedi. “A $50,000 annual premium can, for example, provide close to $1,700,000 in death benefit. That’s pretty good leverage.”