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Maximize Endowments by Leveraging Life Insurance

Published on by George Sparks in Wealth Management

Maximize Endowments by Leveraging Life Insurance

During your lifetime, there are many drivers for seeking life insurance policies; oftentimes to function as a replacement of income in the event of tragedy or other loss.  Each situation is unique; however, and beneficiaries can be set as family members, children, a closely held business or even a business partner.  As circumstances evolve, so do the needs for these policies.  Evaluation of the potential impact of payout and consideration for the values of these policies can determine if the intended purpose has run its course and should be repurposed.

ILIT to reduce estate

A primary consideration for potential insurance proceeds is if the amount paid at death will push an individual’s estate balance into a taxable position.  Because the exemption amounts are not fixed year over year (2019 exemption $11.4 million) and insurance proceeds are included in the taxable amount, these proceeds could be subject to a top federal tax rate of 40%.

One planning tool is an irrevocable life insurance trust (ILIT).  The trust could be created with an existing life insurance policy or funded to purchase a new policy.  When the life insurance policy is held by this trust, the proceeds will be removed from the estate, reducing the total amount of the estate potentially subject to taxation.  The proceeds are then made available to pay any estate tax generated from the remaining balances in the estate.

Example: A taxpayer has a projected estate balance exceeding the exemption amount.  Included in these balances are existing life insurance policies with a payout of about $2 million.  An ILIT was created to purchase a new policy.  The existing policies are converted to annuities to payout the cash balances of the policies over 10 years.  These payments, gifted to the ILIT, are sufficient enough to purchase a $7.5 million policy.  Effectively, the taxable estate is reduced, and the payout to the ILIT is tripled.

Step further – leaving a legacy

 One of the greatest achievements in building wealth is the ability to also offer monetary support to organizations for which you have a passion.  After spending a lifetime becoming financially independent, it is a powerful goal to share your wealth by leaving an endowment or other gifts to a charity.  By gifting a life insurance policy, not only are the potential proceeds removed from the balance of an estate but also a significant benefit is being left to the recipient organization.  When a qualified charity is made both the owner and beneficiary of a policy, a taxpayer is also entitled to a deduction equal to the premiums paid overtime or the cash value of the policy.

Example: Gifting a policy premium amount to the desired organization.  The organization then uses the cash gift as directed, that is, to purchase a life insurance policy on the individual.  In this case, the face amount of the policy purchased has a much larger value than the cash that was gifted, resulting in a larger benefit to the organization.   

Reviewing the purposes of life insurance policies and current legacy goals can identify opportunities to reposition existing policies.  By using planning tools, an individual can achieve their desired gifting objectives while leveraging the assets available.  The result is avoiding unnecessary tax obligations and increasing the opportunity to gift.

Contact Us

If you have questions about ILIT or wish to know how you can take advantage, have a member of our Financial Planning team contact you at no charge here, or by calling 513-241-8313.


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