On April 25, 2018

A very important tool to utilize in estate planning is life insurance. Your benefactors can use it to manage some of the taxes due on your estate, pay creditors off, or just take advantage of the income in the event your income is no longer accessible. In this discussion we’ll look at a few different ways life insurance can be utilized and some errors that some people make on their own when planning their estates.

Paying Off Estate Tax

Factoring Life Insurance into Estate Planning | Denver Estate Planning Attorney

Factoring Life Insurance into Estate Planning | Denver Estate Planning Attorney

One scenario that is worth discussing is if, say for example, Uncle Larry died and left his massive estate to his son, Tyrone. Upon his death a large estate tax comes due and Tyrone is left scratching his head as to how to pay off the rather large estate tax bill. In addition to hiring a knowledgeable Denver estate planning attorney to help Tyrone navigate the complexities of closing the estate, he weighs his options on how to pay the estate tax. Here’s his options:

  • Borrow from an IRA or 401(k) plan and forfeit a certain amount of tax penalty deduction.
  • Sale assets or real estate
  • Tap into the income available through Uncle Larry’s life insurance policy

We think the last option is the best choice, because Tyrone was probably named a beneficiary on the policy and he can take proceeds from it without any penalty. Whereas he can hold onto the real estate and assets and take his time getting the most value by properly marketing them. Some of those assets may have been intended for other beneficiaries anyway. And, Tyrone can continue to take modest distributions from the IRA or 401(k) without being penalized too severely, or he can save them for his own retirement.

Things to Not Do with Life Insurance Policies

  • One Beneficiary Designation – This is a fatal flaw! At the very least make one back-up beneficiary to your primary beneficiary, in the event your primary beneficiary precedes you in death.
  • Designating Estate as Beneficiary – This is a mistake as well. This puts your life insurance policy back into a taxable area. Your creditors will also be able to tap into this revenue supply as well. This will create more complexity for your executor, who must go through legal hurdles to get a beneficiary then designated. So, be sure to name beneficiaries or charities.
  • Misplacing Life Insurance Policy – Make sure this important document is easy accessible. Don’t hide it away, so that it will never be found again. In fact, make sure you have a folder labeled “Estate Plan” on it and keep it among your important documents. The common time table for reviewing a life insurance plan is about once every three years. It needs to be updated, if you change marital status, get divorced, or if a beneficiary dies before you do.
  • Get Enough Insurance Coverage – Make sure you consider all the things you hope your life insurance policy pays off. Is intended to pay off a house, put child through college, or pay off excess debt? Anymore, there’s a life insurance policy for just about any incident you can think of. Choose wisely.

Contact a Denver Estate Planning Attorney at JR Phillips & Associates, PC

If you are ready to set up your estate and creating life insurance is one of the tools in your planned arsenal, let the professional Denver Estate Planning Attorney at JR Phillips & Associates, PC assist you with the complexity of setting up a large estate plan. Our years of experience and solid reputation, as well as compassionate and caring attention will put you at ease, while we help you attend to your final affairs. Our team prides itself on being consummate professionals and very astute to the details, all at an affordable rate.

To discuss your estate planning options and strategies, call us at (303) 741-2400 or email us using the contact form at the top of this page.

Headquartered in Denver, JR Phillips & Associates represents clients throughout the southwest and southeast Metro Area, including (but not limited to) people in Highlands Ranch, Littleton, Castle Rock, Parker, Aurora, Greenwood Village and Englewood.

Categories: Estate Planning, Estate Taxes, Life Insurance