(Accounting Today) - For the past 60 or more years, the community of estate planners (tax attorneys, accounting firms, financial planning firms, etc.) have utilized cash value life insurance policies and death benefits, which they provide for many reasons in financial and estate planning for their clients.
The policies provide both an exceptional level of tax-favored savings based upon the fact that the inside build-up on the policies is tax-free (or deferred until surrender or lapse), and the death benefit proceeds are income-tax-free and, with proper planning, estate- and gift-tax-free. As such, these policies create an excellent source for the payment of estate and other transfer taxes as well as the augmentation of family income and wealth after the death of the senior generation.
It is not uncommon to refer to the life insurance policy as a tool whereby clients can pay for the transfer tax for their family through the use of discounted dollars. The life insurance policy premiums provide income- and estate-tax-free dollars for the family unit by making them owned by and payable to an irrevocable life insurance trust (which will lend money to the estate or buy illiquid assets from the estate) to pay the taxes instead of having the client create a sinking fund of cash to provide the full amount of taxable capital to pay the taxes (or to fund a trust with 100 cents on the dollar to pay the taxes).
Life insurance has traditionally been used to provide a source of income continuation for their clients when the primary breadwinner dies. Recently, the industry has evolved, as has the planning process. It is now far more common for us to do planning with variable life insurance policies for entire segments of the upper income and high-net-worth marketplace of consumers.
High-net-worth (HNW) and ultra-high-net-worth clients are now far more interested in acquiring life insurance policies as an asset class that can provide favorably taxed income distributions, as well as income and estate tax free death benefits to meet their estate tax and wealth preservation objectives. This comes as a result of an insurance strategy that now allows a larger amount of accumulated cash value to grow and accumulate tax deferred indefinitely, despite the recently enacted SECURE Act.
By Steven A. Horowitz
Henry Montag
January 04, 2022
