If you have life insurance, you should also have an estate plan. One of the first things people do when they have a baby or purchase a home is get life insurance. Life insurance can cover significant expenses if you pass away and give you peace of mind when thinking about an unexpected death.
But so many people get life insurance without getting an estate plan. One reason could be cash flow. Having a baby and buying a home can be a shock to your bank accounts. However, life insurance can be paid in low monthly amounts. It doesn’t have to be a huge investment initially. Of course, you pay $100 a month for 30 years, the total investment can be high, and if it’s a term policy, you might never see that money. An estate plan is a bigger investment upfront, but it doesn’t expire unless you change your mind about how your plan is laid out.
So, if you’ve purchased life insurance to cover a mortgage or get your kids through college, what is holding you back from securing the rest of your estate? Life insurance and estate plans work together; they go hand in hand.
Life insurance provides funds to cover large expenses like a mortgage or your kids’ college tuition. But is your home protected from the probate process? Do you have guardians in place for your kids? Do you have a trust in place to hold money for minor children?
Furthermore, life insurance death benefits are included when calculating whether your estate owes a tax. The estate tax threshold in Massachusetts is $1,000,000 per person. If you have $1,000,000 of life insurance, that asset alone will cause an estate tax to be paid when you die. There is a big myth that life insurance is tax free. It is income tax free, but not estate tax free. This is Taxachusetts, they are going to get their taxes one way or another!
One option is an irrevocable life insurance trust (ILIT). This is a specific trust that can hold life insurance policies and remove the death benefit from the estate tax calculation. There are steps that need to be taken to completely remove the policy from your estate tax calculation, but once it is set up properly, it works like a well-oiled machine. If your life insurance policy is the only asset that keeps you under the $1,000,000 threshold, an ILIT could be a great option for long-term planning. And if your other assets are still over the $1,000,000 threshold, an ILIT can still help to reduce your tax liability.
Therefore, if you’ve purchased life insurance, you should talk with your estate planning attorney about how your policy affects your estate plan. And if you don’t have an estate plan, now is the time to do it!
And it doesn’t have to be a huge lump sum to get your estate plan done, ask your attorney about payment options! The best way to protect your assets and your kids is to get life insurance and your estate plan done. It shouldn’t be an either-or situation!
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Natick, MA 01760
Ladimer Law specializes in estate planning. We protect our clients, their heirs, and their assets by listening closely, knowing the law, and executing estate plans that fit and evolve.