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Friday, May 21, 2021

The Important New Roles of Life Insurance In Estate Planning

A proactive approach to estate planning can help safeguard assets from taxation and effectively transfer wealth to intended beneficiaries.

Unfortunately, recent political developments and retirement trends are expected to render estates vulnerable to higher taxation, raising concerns among individuals and estate planners.

In response, Florida estate planning attorneys share insights about the important new role of life insurance in estate planning.

Developments and Trends Impacting Your Estate Plan

Retiree Migration

There has been a long-standing trend among retirees to flee high-tax states in favor of more tax-friendly environments. This is especially apparent with the outflux of retirees from California and New York into states like Texas and Florida.

When retirees leave high-tax states, they take their retirement funds and pension distributions with them, causing states to lose tax revenue from those sources. The result is often an increase in state taxes and inheritance taxes for those who remain.

Political Shifts

Recent shifts in the national political landscape will likely result in higher federal tax burdens and lower federal tax exemptions. Some expected changes include:

  • Loss of income tax basis step-up at death
  • Capital gains at death and at the time lifetime gifts are distributed
  • Higher general federal income tax rates
  • Increased taxation on capital gains, IRA, and qualified retirement plan distributions

Diversifying or redirecting retirement funds into a tax-protected investment, such as cash value life insurance, might be worth investigating.

The SECURE Act

The SECURE Act generally requires tax-deferred qualified retirement plan benefits to be paid out within the first ten years of the participant’s death. How the new distribution requirements will affect your estate and heirs should be considered in review of your estate planning objectives.

How Can Insurance and an Insurance Trust Help?

Incorporating cash value life insurance into your estate plan has many benefits. Insurance distributions have historically been used in estate planning to:

  • Pay estate taxes
  • Pay debts
  • Replace lost income of the decedent

However, in response to the potential new tax concerns outlined above, redirecting retirement funds into an appropriate life insurance policy may now offer additional benefits.

By building up the cash surrender value of life insurance, policyholders can effectively push funds into a tax-free investment, as life insurance proceeds are tax-free income to beneficiaries.

Redirecting deposits from IRAs and other qualified retirement plans into a cash value life insurance policy establishes a tax-free asset for named beneficiaries.

Further, transferring a life insurance policy into an irrevocable insurance trust removes the insurance policy from the policy owner’s taxable estate. The death benefit of the policy does not increase the estate’s taxable assets.

Why You Need a Florida Estate Planning Attorney

An estate plan should be regarded as a living, breathing document that requires ongoing maintenance during your lifetime.

Ever-evolving tax and estate laws can affect which estate planning tools are right for you, and may require changes to your plan to protect your wealth better.

Different circumstances will demand various tools to serve your goals effectively. As times change, some tools take on new significance, as is the case with life insurance and irrevocable life insurance trusts.

Whether you need an estate plan or want to revise an existing plan, it’s wise to seek counsel from a qualified estate planning lawyer.

Contact our law firm today to consult with an experienced Florida estate planning attorney and a comprehensive assessment of your estate planning needs.


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The Law Office of Jeffrey A. Herzog, P.A. assists clients in Florida, including North Pinellas County, Palm Harbor, Trinity, West Pasco County, and the surrounding areas.



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| Phone: (727) 789-4000

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