Life insurance is a great way to provide your family with liquid assets after you pass away, but if the policy benefits would put your estate over the estate tax exemption, then you might consider a trust.
When planning the estate of a family's primary breadwinner one of the biggest concerns is providing the necessary cash assets for the rest of the family to live on while everything else gets settled. This is especially the case if the estate is expected to go through probate or if most of the estate assets are difficult to sell quickly.
One of the best ways around this problem is through the use of life insurance. The policies pay out in cash almost immediately. However, as Forbes points out in "3 Considerations for an Irrevocable Life Insurance Trust" the solution is not always perfect.
One of the problems with life insurance policies is that the benefits can be counted for estate tax purposes. This is especially problematic if the benefits would put your estate over the exemption limit when it would not be otherwise.
One way to get the advantages of life insurance while avoiding the estate tax problem is to create an irrevocable life insurance trust. The trust becomes the owner and the beneficiary of the life insurance policy and keeps the benefits out of the estate tax calculations. However, if you transfer ownership of an existing life insurance policy, then you must live for three years to avoid having the IRS include the death benefit value in your estate anyway.
If you have questions about irrevocable life insurance trusts or other ways to provide liquid assets to your family after you pass away, then speak with an estate planning attorney about the options.
Reference: Forbes (Sept. 19, 2016) in "3 Considerations for an Irrevocable Life Insurance Trust."
