Estate Plans

1. Basic Life Insurance in a Will or Revocable Living Trust

• You own a life insurance policy personally and name your estate, will, or revocable living trust as the beneficiary.
• Benefits: Proceeds help pay estate taxes, debts, funeral costs, or provide immediate cash to heirs.
• Drawback: Policy death benefits are included in your taxable estate, which may trigger estate taxes in larger estates.

2. Irrevocable Life Insurance Trust (ILIT)

• You create an irrevocable trust that owns the life insurance policy (you cannot be the trustee or retain control).
• You gift money to the trust (often using the annual gift tax exclusion) so the trust can pay the premiums.
• Key Advantages:
  
  • Removes the death benefit from your taxable estate.
  • Provides estate tax-free liquidity to heirs.
  • Can include “Crummey” provisions to allow beneficiaries limited withdrawal rights for gift-tax purposes.
• Best for individuals with estates large enough to face federal or state estate taxes.

3. Spousal Lifetime Access Trust (SLAT) + Life Insurance

• One spouse creates an irrevocable trust for the benefit of the other spouse (and eventually children).
• Life insurance can be owned inside the SLAT.
• Allows the grantor spouse to indirectly access funds through the beneficiary spouse while removing assets from the estate.

4. Premium Financing

• Instead of paying large premiums out of pocket, you borrow money from a bank or specialty lender to pay the policy premiums.
• The policy is typically owned by an ILIT or other irrevocable trust.
• How it works:
  
  • Borrower uses the policy’s cash value or death benefit as collateral.
  • Interest on the loan may be paid annually or accrued.
  • At death, the loan is repaid from the tax-free death benefit; the remainder goes to heirs or the trust.
• Benefits: Preserves your cash/liquidity for investments or lifestyle; leverages low interest rates; excellent for high-net-worth clients who want large policies without draining current assets.
• Risks: Interest rate changes, policy underperformance, or lender recalls can create issues.

5. Charitable Remainder Trust + Life Insurance

• You fund a Charitable Remainder Trust (CRT) with appreciated assets, receive income during life, and leave the remainder to charity.
• You use a life insurance policy (often in an ILIT) to “replace” the value of the gifted assets for your heirs.

6. Survivorship (Second-to-Die) Life Insurance

• Pays out only after both spouses have passed.
• Usually much less expensive than two separate policies.
• Commonly used in ILITs to pay estate taxes on large marital estates (ideal when the unlimited marital deduction defers taxes until the second death).

7. Business-Related Strategies (Buy-Sell Agreements & Key Person)

• Life insurance funds buy-sell agreements so surviving owners can buy a deceased partner’s shares without disrupting the business.
• Proceeds can also be used in estate plans to keep family businesses intact.