Life insurance can be a powerful estate planning tool for nontaxable estates

For years, life insurance has played a critical role in estate planning, providing a source of liquidity to pay estate taxes and other expenses. It’s been particularly valuable for business owners, whose families might not have the liquid assets they need to pay estate taxes without selling the business.

Under the Tax Cuts and Jobs Act, the estate tax exemption has climbed to an inflation-adjusted $10 million per person through 2025 (projected to be just over $11 million per person for 2018). Even before the increase, federal estate taxes weren’t a concern for the vast majority of families, and now even fewer families are at risk. But even for nontaxable estates, life insurance continues to offer significant estate planning benefits.

Replacing income and wealth

If you die unexpectedly, life insurance can protect your family by replacing your lost income. It can also be used to replace wealth in a variety of contexts. For example, suppose you own highly appreciated real estate or other assets and wish to dispose of them without generating current capital gains tax liability. One option is to contribute the assets to a charitable remainder trust (CRT).

As a tax-exempt entity, the CRT can sell the assets and reinvest the proceeds without triggering capital gains tax. In addition, you can enjoy an income stream and charitable income tax deductions. Typically, distributions you receive from the CRT are treated as a combination of ordinary taxable income, capital gains, tax-exempt income and tax-free return of principal.

After the end of the CRT’s term (which can be a specific number of years, your lifetime or even the joint lifetimes of you and your spouse), the remaining trust assets pass to charity, reducing the amount of wealth available to your children or other heirs. But you can use life insurance to replace that lost wealth.

You can also use life insurance to replace wealth that’s lost to long term care (LTC) expenses, such as nursing home costs. Although LTC insurance is available, it can be expensive, especially if you’re already beyond retirement age.

For many people, a better option is to use personal savings and investments to fund their LTC needs and to purchase life insurance to replace the money that’s spent on such care. One advantage of this approach is that, if you don’t need LTC, your heirs will enjoy a windfall.

Finding the right policy

These are just a few examples of the many benefits provided by life insurance. We can help you determine which type of life insurance policy is right for your situation and assist in finding the right insurance agent for you.

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Tax Cuts and Jobs Act expands appeal of 529 plans in estate planning

It’s common for grandparents to want to help ensure their grandchildren will get a high quality education. And, along the same lines, they also want the peace of mind that their wealth will be preserved for their children and grandchildren after they’re gone. If you’re facing these challenges, one option that can help you conquer both is a 529 plan. And it’s become even more attractive under the Tax Cuts and Jobs Act (TCJA) recently signed into law by the President and effective January 1, 2018.

529 plan in action

In a nutshell, a 529 plan is one of the most flexible tools available for funding college expenses and it can provide significant estate planning benefits. 529 plans are sponsored by states, state agencies and certain educational institutions. You can choose a prepaid tuition plan to secure current tuition rates or a tax-advantaged savings plan to fund college expenses. The savings plan version allows you to make cash contributions to a tax-advantaged investment account and to withdraw both contributions and earnings free of federal — and, in most cases, state — income taxes for “qualified education expenses.”

Qualified expenses include tuition, fees, books, supplies, equipment, and a limited amount of room and board. And beginning this year, the TCJA has expanded the definition of qualified expenses to include not just postsecondary school expenses but also primary and secondary school expenses. This change is permanent.

529 plan and your estate plan

529 plans offer several estate planning benefits. First, even though you can change beneficiaries or get your money back, 529 plan contributions are considered “completed gifts” for federal gift and generation-skipping transfer (GST) tax purposes. As such, they’re eligible for the annual exclusion, which allows you to make gifts of up to $15,000 per year ($30,000 for married couples) to any number of recipients, without triggering gift or GST taxes and without using any of your lifetime exemption amounts.

For estate tax purposes, all of your contributions, together with all future earnings, are removed from your taxable estate even though you retain control over the funds. Most estate tax saving strategies require you to relinquish control over your assets — for example, by placing them in an irrevocable trust. But a 529 plan shields assets from estate taxes even though you retain the right (subject to certain limitations) to control the timing of distributions, change beneficiaries, move assets from one plan to another or get your money back (subject to taxes and penalties).

529 plans accept only cash contributions, so you can’t use stock or other assets to fund an account. Also, their administrative fees may be higher than those of other investment vehicles. Contact us to help you plan for the distribution of your wealth using various estate planning strategies, such as a 529 plan.

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Preserve wealth for your beneficiaries using asset protection strategies in your estate plan

There are many techniques you can use to protect your assets after our passing for the benefit loved ones.  It’s about preserving your hard-earned wealth from the beneficiary’s unreasonable creditors’ claims, frivolous lawsuits, financial predators, poor decision making, the influence of an unscrupulous or financially inept spouse and other threats.

Assess the risk to beneficiaries of outright distributions

There are two primary ways to leave assets to a beneficiary: outright or in trust.  An outright distribution puts the asset into the legal name of the beneficiary.  This means there is no restrictions or protections around it; the beneficiary owns the asset.  A distribution in trust means that a trustee will hold legal title to the asset and the beneficiary will have beneficial interest in the trust assets.  The trust will whatever terms, provisions, restrictions, incentives, etc. that you determine will govern how and when assets are used for the beneficiary.

In determining whether to make a distribution outright or in trust, the first step is to assess the risk that creditors, former spouses, current spouses, or opportunists will go after your beneficiaries’ assets once you are gone.  Furthermore, you need to analyze and consider the relative ability of the beneficiary to manage the asset for himself or herself.  Do they make good financial decisions?  If the risk is relatively low that the assets will be attacked by third parties or squandered by the beneficiary due to poor decisions or inadequate management skills, but you seek added peace of mind for the benefit of your beneficiaries, you might consider the simpler technique of an outright distribution.  However, if the risk is more significant — for example, if your beneficiary is in a bad marriage, if your beneficiary has a disability, if your beneficiary has a substance abuse problem, if you beneficiary has poor financial management skills, if your beneficiary owns a business, or is in a profession with a high degree of malpractice risk or are involved in other activities that expose the beneficiary to potential financial liability — you might consider more sophisticated approaches like a trust.

If you choose the trust route because of a desire to protect the assets for your beneficiaries, consider using an independent trustee and giving that trustee full discretion over distributions from the trust. The combination of naming an independent trustee and a spendthrift provision could provide significant protection for the beneficiary during his or her lifetime while still allowing them to enjoy the benefits of the trust assets.  A spendthrift provision prohibits your beneficiaries from selling or assigning their interests in the trust, either voluntarily or involuntarily.  State laws will vary on what can pierce a trust even with a spendthrift provision.  For example, Georgia has several exceptions, including child support, alimony, intentional torts, and criminal restitution.

Start planning now

Whichever strategy you choose, it’s critical to start the discussions with your family and your estate planning professional.  People are often driven by a perceived need for simplicity for simplicity’s sake in estate planning; however, simplicity (i.e., an outright distribution to a beneficiary or beneficiaries) may be the absolute worse choose that can be made.  You should consider your options thoroughly with an estate planning attorney to customize a plan that meets the specific needs of you and your beneficiaries.

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