Life Insurance for Estate Planning

By Steven J. Gibbs, Esq.

When people think about estate planning in Florida, most of the time the focus involves the legal documents that need to be put in place. However, there is another side to estate planning that involves

certain tools that can be strategically used to support your overall estate planning goals.

One such tool is using life insurance for estate planning. It is therefore important to understand how life insurance, wisely implemented, can complement your estate plan or even provide critical support to prevent a catastrophe.

When Life Insurance is Useful for Estate Planning
There are many situations when life insurance for estate planning may be useful, or even critical. However, the following 5 are perhaps the most common examples of when life insurance for estate planning is needed to complete an estate plan.

Spouse Lacks Adequate Financial Support
Business Continuity Succession Planning
Federal Estate Tax Planning
Asset Protection Planning
Generational Planning

Estate Planning and Life Insurance for Spousal Financial Support
If a spouse is likely to be left without adequate financial resources following the death of a spouse, life insurance for estate planning should become a “no brainer”. However, surprisingly it is not always thought about, even where the breadwinner spouse is in good health. Thus, I hope this is a good reminder. Recently, this actual scenario came up with a client who was concerned that his wife would be left without adequate income if he passed away. This was a second marriage situation and most of the assets and retirement income was in the husband’s name.

Sometimes, with multiple marriages concerned, social security and even other retirement such as pensions may be required to pass to the first spouse.

The solution of course is to name a surviving spouse as the beneficiary of a life insurance policy to afford him or her a death benefit to provide support.

Estate Planning and Life Insurance for Business Succession Planning
One of the key aspects of business continuity succession planning in Florida is needing to create liquidity for any number of purposes which may include needing cash to:

allow heirs pay estate taxes in order to keep an asset heavy business viable

allow heirs or business partners to buy out the business from other heirs or partners

When family businesses are concerned, life insurance for estate planning is often the difference between continuing to operate, avoiding a “fire sale” OR closing the business. This is particularly true with asset heavy businesses such as family farms, trucking companies, or car dealerships.

Estate Planning and Life Insurance for Federal Estate Tax Planning
Luckily, there is no state estate tax in Florida. However, federal estate tax planning in Florida remains a major concern for estates that are over the asset limit.

As of this post date, the federal estate tax limits are $5,490,000 for a single person or double that for a married couple.

Similar to the concerns that pertain to business succession planning, liquidity to pay federal estate taxes is a major concern even if a family business isn’t in the picture. The federal estate tax is a lump sum tax that is typically due within 9 months of the estate owner’s death. Although an estate may be deemed to exceed the asset limits, if the estate is asset heavy, then assets would need to be sold to pay the estate taxes and this may involved the forced sale of homes and other income producing assets such as investment real estate.

Estate Planning and Life Insurance for Asset Protection
A major benefit of life insurance for estate planning in Florida, both during the lifetime of the policy owner AND upon their death, is the asset protection laws in Florida that favor life insurance. These protection make life insurance an important part of Florida asset protection planning, as well as estate planning. Better yet, combining life insurance with an irrevocable trust in Florida creates multiple layers of protection that serves all of our 3 areas of estate planning discussed in this article above.

The simple overview of using an irrevocable trust with life insurance is:
For asset protection, a trust can be created to own the life insurance rather than an individual insured owner. Having an irrevocable trust own the policy gives it asset protection because it is owned by an entity that is outside of the individual name of the insured. This independent ownership make it unreachable by the insured’s creditors.

For estate tax planning, if a trust owns the life insurance policy, subject to a 3 year rule, neither the cash value in the policy OR the death benefit, upon the insured’s passing, will be included in the estate for taxation purposes. This means that a policy can accrue death benefit outside of the estate without causing a concern about federal estate taxes. The 3 year rule requires that the irrevocable trust must be established for 3 years prior to the estate owner’s death in order exempt the proceeds from estate taxation.

As a great side benefit, using any type of trust with life insurance for estate planning will lessen the likelihood that the insurance death benefit will be directed to probate administration in Florida or elsewhere. The reason that trusts avoid probate in Florida and other states is because the assets become titled in the trust and the trust may direct where the proceeds are distributed upon the trustmaker’s death.

Estate Planning with Life Insurance for Generational Planning
A third reason that irrevocable trusts are often used to hold life insurance for estate planning is generational planning. Often the special type of irrevocable trusts used for this purpose are called irrevocable life insurance trusts or ILITs.

ILITs offer all of the benefits mentioned above for asset protection and federal estate tax planning AND are specifically focused on generational planning for children and grandchildren. The 3 year rule noted above applies AND other formalities need to be followed, such as Crummy letters, sent to the beneficiaries each year to make sure and protect the status of the ILIT. ILITs can be particularly effective with what is called a second to die life insurance policy for estate planning in wealthier households where the surviving spouse does NOT need the life insurance proceeds for ongoing support.

If the proper steps are followed, the ILIT can be an outstanding tool to create a nest egg for younger generations that is protected from both federal estate taxes and other creditors.

The above are only the most common scenarios in which life insurance becomes a critical aspect of the estate plan. As always, each case is specific and should be discussed with your trusted Florida estate planning attorney prior to making any decisions in Florida, and, if you’re in another state, I highly recommend connecting with a locally licensed estate planning professional.

Steven J. Gibbs is a trust and estate planning attorney who provides complete Estate Planning, Trust Planning, Business Planning, Asset Protection, Elder and Medicaid Planning, Real Estate, Probate and Trust Administration legal services in Florida and Planning, Real Estate, Probate and Trust Administration legal services in Florida and California. Steve’s main offices are located in Fort Myers, Florida, and San Juan Capistrano, California. Estate planning legal services are provided statewide in these locations.

The Gibbs Law Office was founded by Steven Gibbs in January 2009 upon the commitment to provide client-centered legal services.

Steven Gibbs founded the Gibbs Law Office in January 2009, committed to providing client-centered legal services.

Steve as he would rather be called, is not your typical attorney. If you appreciate the staunch egotistical mannerism of most firms, you will be delighted with Steve’s unpretentious approach to educating and then assisting his client. Instead of giving you his complacent and lofty ideas, he would rather pursue your expectations with professional conversation about

resolving your concerns under the Law. It’s your life and it’s his job to make your legal expectations come true while using years of his guidance and knowledge.

Steve was admitted to the Minnesota Bar in 1999, the Florida Bar in 2007 and was admitted to the California State Bar in 2014.

Along his career path, he was an associate attorney for an insurance defense law firm; an in-house real estate negotiator for Target Corporation; and corporate counsel for Civix, LLC and Vice President for North American Properties where he was responsible for various real estate transactions, including legal issues and negotiating unresolved business issues. Prior to opening Gibbs Law Office, PLLC, he was an associate with the firm of Roberts & Engvalson, P.A. where he gained his knowledge of trusts, estate planing and Wills. He opened his own firm in 2008 and now focuses on laws that will enrich the needs of his clients throughout their lives and those of their children. The firm has developed a practice dealing only with Trusts and Estate Planning, Wills, Medicaid Planning, Elder Law, Real Estate, Business Law and Probate.

Quoting from Steve “I decided to practice in areas that families will need as they progress down life’s path. To help them with a solid foundation that will carry them throughout there lives is a rewarding experience for me and my staff.”