Why Your Life Insurance Should Always Be Included in Your Estate Plan
The best way to take care of your loved ones after you pass away is by having a comprehensive estate plan. Drafting an estate plan now with a New Jersey estate planning attorney allows you to manage your assets while you‘re alive and plan precisely how you would like them to be distributed upon your death. It is also wise to incorporate life insurance into your estate plan, even if you plan to leave behind a large estate with many assets. Life insurance will provide essential financial support to your beneficiaries in many ways, and it will also serve to protect the assets held within your estate.
How Life Insurance Can Benefit Your Estate
Every individual’s estate planning needs vary and are determined by several factors, including family size, income, assets, and more. However, life insurance is a beneficial financial product that works effectively for everyone when used in conjunction with an estate plan. Life insurance will protect your estate and your loved ones by offering immediate liquidity that your estate may be unable to provide at the time of your death. The proceeds from a life insurance policy are generally tax-free for your beneficiaries. These cash proceeds become available immediately upon your death and can be used to:
- Replace lost income. If you are the primary earner in your household, you will want to provide monetary support that will lessen your family’s burden and help them transition through the loss. It will allow them to maintain a good standard of living as they recover financially.
- Pay off any debts. – Your beneficiaries will be able to pay off any debts you incurred and save your estate from creditors filing claims against it in probate court.
- Cover funeral costs. Life insurance provides instant access to funds to cover funeral expenses, which can be exorbitant. Making these funds available to loved ones eases their burden during a difficult time.
- Pay estate taxes on large estates. Individuals that have estates with assets that include multiple homes, jewelry, and other investments can greatly benefit from having a life insurance policy because it will enable beneficiaries to use the proceeds to pay taxes on the estate without having to sell off parts of it to gain access to funds.
- Divide a family business. Life insurance is commonly used to divide family business ownership after a business owner’s death. In this situation, if ownership is to be split equally among beneficiaries, everyone can choose to maintain or sell their stake in the business. This ensures that the company will continue to seamlessly operate in the event of a death in the family.
The Irrevocable Life Insurance Trust (ILIT)
If your estate is large enough to incur federal estate taxes, you will want to discuss using an Irrevocable Life Insurance Trust (ILIT) with your estate planning attorney. Implementing this strategy will allow you transfer to your life insurance policies into the ILIT and keep them separate from the rest of your estate. Doing this will prevent your life insurance policies from being counted as part of your gross estate and, therefore, subject to federal estate tax.
Because the ILIT is irrevocable, it cannot be changed. Once you transfer your life insurance policies to this trust, it is permanent, and a trustee is appointed to manage and distribute the funds to the ILIT’s named beneficiaries.
There are many working components in an estate plan, and each plan is created to suit the unique needs of every client. Comprehensive estate planning will assist you in caring for your loved ones long after you’re gone and requires enlisting a skilled and experienced estate planning firm that you can trust. Consult with BMC Estate Planning about your estate planning needs and learn how you can best protect your family in the future. When you enlist BMC, we become your trusted partner for life.
Getting in touch
Borenstein, McConnell & Calpin, P.C. is a Wills & Estate Planning law firm serving Central and Northern New Jersey, as well as New York City. We strive not only to give you a great client experience, but to become your trusted adviser for life. To reach Alec, please send an email to email@example.com.
155 Morris Avenue, Suite 201
Springfield, NJ 07081
3 Werner Way, Suite 230
Lebanon, NJ 08833
4607 Fort Hamilton Parkway
Brooklyn, NY 11219