Don’t use life insurance to pay estate taxes?

Now there’s an interesting statement coming from an author of a blog on life insurance!

It was just to catch attention but there is an interesting alternative method. Instead of using the life insurance to pay the estate taxes. Have the life insurance go to the children (estate tax free if set up properly by an attorney in in an ILIT - Irrevocable Life Insurance Trust), then have the balance of the estate placed in a Charitable Lead Trust. A Charitable Lead Trust (CLT) is a unique instrument where the interest on the principal is used by the charity for a number of years. At the end of those years, the principal (in this case one’s estate) goes to the children estate and income tax free. If the charity chosen was a family foundation, then the children can direct funds to help social, health, community and/or religious programs.

Thus you create three “inheritances”: 1. At death through ife insurance 2. At the end of 15 to 20 years where the original amount (plus any earnings in excess of the federal rate) go to the heirs estate and income tax free and 3. An inheritance to help society that can be directed by the children through a foundation. In this solution, no estate taxes are paid. One has, in a way, redirected taxes towards one’s favorite charitable causes. You’ve been able to “dial in” a tax free benefit at death, delay a second inheritance which would have been likely planning anyway (and make it tax fee as well) and help your children contribute to society through your legacy.

Compare this to the most common solution (which is still better than no solution). Life insurance is purchased through an ILIT as an estimate of estate taxes. At death, the trust with the insurance proceeds, buys assets from the estate equal to the estate taxes and the estate pays the taxes.

Why not have it all using the “three inheritance” solution. The experts at lifeinsure.com can discuss these alternatives with you in concert with your legal and financial professionals.

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