One way to protect future heirs is to insure your life so that, at your passing, estate taxes can be paid with the proceeds from a high value life insurance policy.
Typically, in such arrangements, the policy is held separate from the rest of the estate, in a trust. An insurance policy can directly benefit your heirs and other beneficiaries. The proceeds of the policy can be used to:
- Cover estate taxes and thereby avoid liquidating assets or disrupting an investment portfolio.
- Retain control of significant or non liquid assets, such as a concentrated stock position.
- Provide funds to sustain a business.
Potential Benefits
Financing the cost of a high-value insurance policy can benefit you and ultimately your estate in many ways, now and in the future, by allowing you to:
- Maximize insurance coverage without adversely affecting your current cash flow or lifestyle.
- Avoid having to sell assets and potentially triggering a taxable event to cover the cost of the premiums.
- Allow accounts within the policy to grow free of income taxes.
Why Borrow?
Not surprisingly, putting such protection in place can come at a significant cost in the form of annual policy premiums. As a result, many clients elect to finance those costs with a loan partially collateralized by the cash surrender value of the policy.
This approach has the added benefit of being tax efficient: The funds that the trust borrows to pay the annual premiums and interest expenses generally are available free of gift taxes.