Before storing all of your documents away when tax season ends, you may find they’ll come in handy as you do a little spring financial cleaning. For example, are your estate plan and life insurance in good order and designed to meet your needs? Do your estate planning documents reflect current information? With the proper strategy, you can combine life insurance with your overall net worth to protect those you love and provide a legacy for your heirs.
One of the first steps to designing your strategy is to update your net worth statement. Utilizing your tax documents can be a great starting point because your taxable accounts are represented on your income tax returns. Your retirement accounts—including Individual Retirement Accounts (IRA), Roth IRAs and company sponsored plans—should be factored in, as well. In addition, don’t forget to include your residence, other real estate, business interests and personal property in your calculations. Lastly, include the amount of current life insurance you have on yourself, whether through your employer or coverage you have purchased.
Life Insurance Benefits
Today, life insurance is a crucial part of many estate plans. It can be used to replace income for your survivors, provide for your children's education, pay off your mortgage and simplify the transfer of assets. Life insurance can also be used to replace wealth lost due to the expenses and taxes that may follow your death, and to make gifts to charity.
When used properly, life insurance can provide tax-free assets to heirs. Proceeds left to a named beneficiary don't pass through the process of probate, so your family won’t have to wait until your estate is settled to get the money needed to pay bills. Since probate typically takes six months or longer, this can be an important consideration if much of your net worth is illiquid (in businesses or real estate) or will be taxable benefits to heirs (qualified retirement accounts).
Life insurance proceeds can also be used to cover the potential costs of settling an estate, including taxes, fees and other debts. The value of an estate can rise or fall depending on many factors. Whether or not your estate is subject to federal and state estate taxes in the future could be quite different than today. Savings, investments, loans and liquidation can all help settle an outstanding estate tax balance. However, such tools may not be enough. In reality, life insurance can be one of the most advantageous ways to alleviate the financial burden of paying an estate tax.
Deciding on the inheritance to leave behind to each of your heirs can help protect against fallout after someone passes away. Assets like businesses and residences may have multiple owners, which is where life insurance comes in—that’s because death benefit proceeds can be used to balance the value of assets. For instance, you can leave behind your business to one child and give death benefits to another. Life insurance can also be used to equalize distribution to heirs using your business. For example, you can have a buy-sell agreement wherein the company buys a life insurance policy that will pay a benefit to participating heirs upon your death.
An Irrevocable Life Insurance Trust (ILIT) removes a life insurance policy from your estate, helping you minimize your estate tax liabilities on assets that do not qualify for a charitable or marital deduction. ILITs can help with wealth management and estate planning. However, they may not be the best option for everyone. Keep in mind that the trust agreement under an ILIT is irrevocable. That means you can no longer change the terms once they are in effect.
Estate Planning Documents
Ensuring your estate planning documents are up to date with the latest information is crucial. For example:
- Do they refer to your children as minors, but they are now adults?
- Do the documents still reflect your current wishes?
- Are the individuals named to act when you cannot still willing and able to take on this responsibility?
- How has your life changed since you put these documents in place?
- Are the necessary documents in place to have your final wishes carried out?
- Do you have a guardian listed for minor children?
Estate planning requires proper preparation, and life insurance can be a lynch pin. Evaluating your needs and goals requires your attention and understanding of the options. The same approach may not be applicable for everyone, so take a look at the particulars of your situation, conduct your own research, consult with professionals and learn about all possible options and alternatives. Plan ahead and consult with your financial team to make sure you and your family are covered.
The Busey Wealth Management team has the knowledge and resources to serve your unique financial and estate planning needs. Learn more by visiting busey.com/wealth-management.
This is not intended to provide legal, tax or accounting advice. Any statement contained in this communication concerning U.S. tax matters is not intended or written to be used, and cannot be used, for the purpose of avoiding penalties imposed on the relevant taxpayer. Clients should obtain their own independent tax advice based on their particular circumstances.
This material is provided for educational purposes only and should not be construed as investment advice or an offer or solicitation to buy or sell securities.
This presentation is for general information purposes only. It does not take into account the particular investment objectives, restrictions, tax and financial situation or other needs of any specific client.
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