Life Insurance Seems To Be A Good Addition To A Total E
Q: Life insurance seems to be a good addition to a total Estate Plan.
It was explained by the salesman that it would be funded by a trust owned by the beneficiaries so as not be a part of the estate. The salesman only sold variable life insurance, i.e., you invested in mutual funds thru it. Is there such a thing as buying only term insurance by the trust instead of the variable policy. If so, why do you think that this salesman did not offer it?
In the past I have always believed in term insurance and invest the invest on my own.
A: -t is possible to invest outside of life insurance and have it stay outside of your estate. The structure of gifting to a properly structured trust is what takes the asset of your estate--the life insurance is merely the investment vehicle used once the funds have made their way into the trust (most likely after the Crummey period expires). A couple of quirks come up at this point, though arguably one of them may allow you to move *MORE* of your funds out of your estate. First, we have to worry about who is going to pay the tax on any earnings. Having the trust pay the tax normally isn't a real good idea, since the trust rockets through the brackets very quickly. One idea that, in theory, works to transfer more of your estate is to have the trust be set up as an intentionally defective grantor trust--for income tax purposes, you are still treated as owner (and therefore pay the tax on the income) but for estate tax purposes the trust is treated as being owned by the beneficiaries. Second, the assets in the trust do not receive a step up in basis at death. While that's also officially true of the assets in the life insurance trust, the conversion of the policy to cash doesn't create an income tax event (life insurance proceeds are normally excluded from income taxation). So when you analyze this option, you are comparing the fact that you are growing the corpus without any expense charge vs. the income tax costs (both personally and for your heirs). If you choose to go without insurance coverage in there, there's also the undeniable fact that at least in the early years the insurance death benefit would give it a significant advantage. You have to run the numbers and then make your choice. You also need to consider other options for dealing with your estate situation--life insurance trusts and intentionally defective grantor trusts are merely two tools in a much larger arsenal of tools available for estate planning. Also, note that these tools have the problem of being irrevocable trusts--while there actually are methods to change things a bit, reality is that if you later decide you fouled up in naming beneficiaries it's not going to be cheap to get things changed (and to some extent may turn out to be impossible). Note that the structures you are talking about normally only make sense if there is a taxable estate. Absent a taxable estate, the life insurance trust doesn't make a whole lot of sense--it may be better to have any life insurance pay into the estate directly for additional flexibility. -you can buy term in a trust. That said, unless you're estate is between the current applicable exclusion amount and $1 million (or $2 million if married) and is not likely to appreciate above those limits, then term is the wrong product. Eventually it will become to expensive to own and that has a tendency to completely ruin any planning you're doing now (read: blow up in your face), so forget about temporary solutions (term) when you need a permanent solution (cash value - whole life, universal life, variable life). Believing in term when you need a permanent policy is a virtual guarantee that your estate will benefit Uncle Sam. Think about it this way: ALL life insurance is term. Some term expires before you do. Other term is guaranteed to never expire -- and deliver on it's promise when your heirs need it most. .
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