Life Insurance for Estate Planning

When people think about Florida estate planning, and most other states, most of the time their focus involves the legal estate planning documents that need to be put in place. However, there is another side to estate planning that involves various tools that can be strategically used to support your overall estate planning goals. One such tool is using life insurance for estate planning.

It is important to understand how life insurance, wisely implemented, can compliment your estate plan or even provide critical support to prevent a catastrophe. All of this will be discussed in more detail to follow.

When Life Insurance is Useful for Estate Planning 

There are many situations where life insurance for estate planning may be useful, or even critical. However, the following 5 are perhaps the most common examples of when life insurance for estate planning is needed to complete an estate plan.

Spouse Lacks Adequate Financial Support

Business Continuity Succession Planning

Federal Estate Tax Planning

Asset Protection Planning

Generational Planning

Estate Planning and Life Insurance for Spousal Financial Support

If a spouse is likely to be left without adequate financial resources following the death of a spouse, life insurance for estate planning should become a “no brainer”.

Surprisingly, it is not always thought about, even where the breadwinner spouse is in good health. Thus, I hope this is a good reminder.

Recently, this actual scenario came up with a client who was concerned that his wife would be left without adequate income if he passed away. This was a second marriage situation and most of the assets and retirement income was in the husband’s name.

Sometimes, with multiple marriages concerned, social security and even other retirement such as pensions may be required to pass to the first spouse.

The solution of course is to name a surviving spouse as the beneficiary of a life insurance policy to afford him or her a death benefit to provide support.

Estate Planning with Life Insurance for Business Succession Planning

One of the key aspects of business continuity succession planning in Florida is needing to create liquidity for any number of purposes which may include needing cash to:

• allow heirs pay estate taxes in order to keep an asset heavy business viable
• allow heirs or business partners to buy out the business from other heirs or partners

When family businesses are concerned, estate planning with life insurance is often the difference between continuing to operate, avoiding a “fire sale” OR closing the business. This is particularly true with asset heavy businesses such as family farms, trucking companies, or car dealerships.

Estate Planning with Life Insurance for Federal Estate Tax Planning

Luckily, there is no state estate tax in Florida. However, federal estate tax planning in Florida remains a major concern for estates that are over the asset limit.

As of this post update, the federal estate tax recently expanded limits which are now $11,200,000 for a single person or double that for a married couple.

Similar to the concerns that pertain to business succession planning, liquidity to pay federal estate taxes is a major concern even if a family business isn’t in the picture.

The federal estate tax is a lump sum tax that is typically due within 9 months of the estate owner’s death. Although an estate may be deemed to exceed the asset limits, if the estate is asset heavy, then assets would need to be sold to pay the estate taxes and this may involve the forced sale of homes and other income producing assets, such as investment real estate.

Estate Planning with Life Insurance for Asset Protection

A major benefit of using life insurance for estate planning in Florida, both during the lifetime of the policy owner AND upon their death, is the asset protection laws in Florida that favor life insurance. More specifically, FL. Stat. Sec 222.14 provides that the cash value of life insurance contracts and annuities in Florida is not subject to legal action from creditors.

These protections make life insurance an important part of Florida asset protection planning, as well as estate planning. Better yet, combining life insurance with an irrevocable trust in Florida creates multiple layers of protection that serves all of our 3 areas of estate planning discussed in this article above.

The simple overview of using an irrevocable trust with life insurance is: 

For asset protection, a trust can be created to own the life insurance rather than an individual insured owner. Having an irrevocable trust own the policy gives it asset protection because it is owned by an entity that is outside of the individual name of the insured. This independent ownership make it unreachable by the insured’s creditors.

For estate tax planning, if a trust owns the life insurance policy, subject to a 3 year rule, neither the cash value in the policy OR the death benefit, upon the insured’s passing, will be included in the estate for taxation purposes. This means that a policy can accrue death benefit outside of the estate without causing a concern about federal estate taxes. The 3 year rule requires that the irrevocable trust must be established for 3 years prior to the estate owner’s death in order exempt the proceeds from estate taxation.

As a great side benefit, using any type of trust with life insurance for estate planning will lessen the likelihood that the insurance death benefit will be directed to probate administration in Florida or elsewhere.

Life insurance can pass to heirs in the same way that assets in a Florida revocable trust can avoid probate because the assets titled in the trust can pass by operation of law as directed by the trust agreement. A life insurance policy is also an agreement that can direct the passing of assets outside of probate.

Estate Planning with Life Insurance for Generational Planning 

A third reason that irrevocable trusts are often used to hold life insurance for estate planning is generational planning. Often the special type of irrevocable trusts used for this purpose are called irrevocable life insurance trusts or ILITs.

ILITs offer all of the benefits mentioned above for asset protection and federal estate tax planning AND are specifically focused on generational planning for children and grandchildren. The 3 year rule noted above applies AND other formalities need to be followed, such as Crummy letters, sent to the beneficiaries each year to make sure and protect the status of the ILIT.

ILITs can be particularly effective with what is called a second to die life insurance policy for estate planning in wealthier households where the surviving spouse does NOT need the life insurance proceeds for ongoing support.

If the proper steps are followed, the ILIT can be an outstanding tool to create a nest egg for younger generations that is protected from both federal estate taxes and other creditors.

The above are only the most common scenarios in which life insurance becomes a critical aspect of the estate plan. As always, each case is specific and should be discussed with your trusted Florida estate planning attorney prior to making any decisions in Florida, and, if you’re in another state, I highly recommend connecting with a locally licensed estate planning professional.

Steve Gibbs, Esq.