Mark Twain famously said, “A classic is something everybody wants to have read, but no one wants to read.” Life insurance is a little like that. Everyone needs it, but we don’t like to talk about it much.
Life Insurance as Key Estate Planning Tool
Life insurance is an amazing estate planning tool. I cannot stress enough the importance of life insurance. I, of course, don’t sell it, so I have no economic stake here. It’s just that life insurance is generally reasonably and affordably priced, yet still so helpful with so many financial goals. Replacing a breadwinner’s earnings is one of the most commons ways it is utilized. But, it can also provide liquid assets for a small business when a key partner dies. Life insurance can also cover costs that you might forget about, like funeral costs or unpaid taxes. While there are many advantages to life insurance, and you most definitely need it, life insurance can also create estate planning issues.
Three Estate Planning Issues Life Insurance May Create
The major issue created by life insurance is that of the “sudden windfall” to your beneficiary. Do you really want, say, your 19-year-old to inherit several hundred thousand dollars at once? Even oldsters with experience managing finances may find a huge influx of cash to be overwhelming.
Another issue to consider: does your beneficiary receive government benefits? If so, proceeds from your life insurance policy might make your beneficiary ineligible for further benefits. By the way, don’t think that those receiving government aid are all elderly. Quite the opposite! A vast majority of Medicaid recipients are under age 44. Regardless of age, any beneficiary on Medicaid, or similar government aid program, is at risk of losing benefits without careful estate planning.
Finally, for high-net-worth (HNW) individuals and families, there is the issue of the federal estate tax. Everything owned in your name at death is included in your estate for estate tax purposes. Yes, that includes the death benefit proceeds of your life insurance policy. Considering that many policies carry quite hefty death benefits (several hundred thousand dollars, or more, not being unusual), this is definitely something for those with HNW to carefully consider.
In Trusts we Trust
I’ve explained trusts generally before. A quick primer: in simplest terms, a trust is a legal agreement between three parties: grantor, trustee, and beneficiary. This allows a third party (the trustee) to hold assets for a beneficiary (or beneficiaries).
There are a nearly infinite variety of trusts. One type of trust is an irrevocable life insurance trust or ILIT.
So, what IS an Irrevocable Life Insurance Trust?
Think of an ILIT as an “imaginary container,” which owns your life insurance policy for you. This provides several benefits. An ILIT removes the life insurance from your estate, i.e., lowers estate tax liability. Like other trusts, an ILIT allows you to decide how, when, and even why your named beneficiary receives life insurance proceeds.
Wait, what was that about the three parties?
The grantor is you, the purchaser of life insurance.
The trustee can be anyone you, as grantor, chooses — an individual(s) or a qualified corporate trustee (like the trust department at your bank). But, note a major difference between an ILIT and other kinds of trusts – with a large number of other trusts, you can name yourself as trustee. With an ILIT, you wouldn’t want to do so, because the IRS may then determine that life insurance really hasn’t left your estate.
Who can be a beneficiary of an ILIT?
Most often, spouses, children, and/or grandchildren are the named beneficiaries of an ILIT. But really, it can be any individual(s) you, as grantor, choose.
Your beneficiary and your life insurance proceeds
The conditions under which a beneficiary receives distributions from an ILIT is up to you. You can, for example, specify that your beneficiary receives monthly or annual distributions. You can decide the amounts. You may even dictate that your beneficiary receives distributions when s/he reaches milestones which you choose. For example, you can provide for a large(r) distribution when a beneficiary reaches a certain age, graduates from college or post-graduate program, buys a first home, marries, or has a child. Or, really, just about any other condition or event that you decide is appropriate.
You also have the option to build in flexibility, so that your trustee has the discretion to provide distributions when your beneficiary needs it for a special purpose, like pursuing higher education, starting a business, making an investment, and so on.
And, of course, if your beneficiary is receiving government benefits, an ILIT can account for that, as well.
Good gosh, is there anything an ILIT CAN’T DO?
Once again, an ILIT is irrevocable. While an ILIT provides a great deal of flexibility, there’s one action for certain you can’t take — you cannot transfer a policy owned by an ILIT into your own name. So, if you think that someday you may need to access the policy’s cash value for your own purposes, you probably shouldn’t set up an ILIT.
Options for “ending” an ILIT
Now, I suppose, there’s nothing requiring you to continue making insurance payments into your ILIT. Depending on the kind of policy you have, your policy may lapse as soon as you miss your premium payment. Or, if your policy has cash value, these funds may be used to pay premiums until all the accumulated cash is exhausted. So, that’s an option for “ending” an ILIT.
I bet you have some questions. Let’s talk!
An ILIT can provide you, your loved ones, and your estate with significant benefits. To learn more, contact me at my email, gordon@gordonfischerlawfirm.com, for a free consultation, without obligation. You can also give me a call at 515-371-6077.
*Yes, you’re right – ILIT is really not a word, but an acronym. You caught me. It’s just that Legal Word of the Day sounds more exciting than Legal Acronym of the Day. Also, congratulations to you for being the kind of person who reads footnotes.
**In 2019 an individual must have an estate of more than about $11.18 million, and a married couple an estate of more than $22.8 million, before they need to worry about federal estate taxes.
What It Means
1 a : the basic principles and laws of a nation, state, or social group that determine the powers and duties of the government and guarantee certain rights to the people in it
b : a written instrument embodying the rules of a political or social organization
2 a : the physical makeup of the individual especially with respect to the health, strength, and appearance of the body
b : the structure, composition, physical makeup, or nature of something
3 : an established law or custom : ordinance
4 : the act of establishing, making, or setting up
constitution in Context
«Historically, Americans maintained the agility of democracy by amending the constitution, on average, at least once a decade, until the pace stalled, half a century ago. Other than a minor amendment in 1992, to adjust congressional salaries, the last major change to the constitution was in 1971, when the voting age was lowered to eighteen.» — Evan Osnos, The New Yorker, 9 Nov. 2020
«Clearly designed for those with a strong constitution, the ride was shown tilting upside down in the video, with a caption asking ‘who’s got a stomach brave enough to go on the Mega Spin?!'» — Barbara Hodgson, Chronicle Live (UK), 2 Mar. 2020
A Good Old-Fashioned Quiz
You know what it looks like… but what is it called?
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Can you make 12 words with 7 letters?
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Did You Know?
Constitution was constituted in 14th-century English as a word indicating an established law or custom. It is from Latin constitutus, the past participle of constituere, meaning «to set up,» which is based on an agreement of the prefix com- («with, together, jointly») with the verb statuere («to set or place»). Statuere is the root of statute, which, like constitution, has a legal background; it refers to a set law, rule, or regulation. Constitution is also the name for a system of laws and principles by which a country, state, or organization is governed or the document written as a record of them. Outside of law, the word is used in reference to the physical health or condition of the body («a person of hearty constitution») or to the form or structure of something («the molecular constitution of the chemical»).
Test Your Vocabulary
Fill in the blanks to complete a word for a system of courts of law: _ _ d _ c _ _ _ y.
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kindred
adjective
having the same belief, attitude, or feeling.
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What is the origin of kindred?
Kindred as a noun means “one’s relatives, kinfolk”; as an adjective, “sharing beliefs, attitudes, or feelings.” Kindred comes from Middle English kinrede, which has many, many spelling variants. Kinrede is a compound of kin and the obsolete suffix –red, –rede, which forms nouns from other nouns. Kin comes from the Old English noun cynn “sort, kind,” from the Proto-Indo-European root gen-, gon– (with many variants) “to beget, give birth.” Cynn is related to Latin genus (plural genera) “birth, descent, origin, kind” (genus and genera are current in English), Greek génesis “origin” (English genesis comes from Greek via the Latin Bible). The Middle English suffix –red, –rede comes from Old English –rǣden, a noun and suffix meaning “condition” (hatred is the only other frequent noun in English with the suffix –red). The spelling kindred with internal d first appears about 1400 and has two possible origins: It may either be epenthetic, intrusive, a glide consonant between the n and r, or the d may be from the influence of the noun kind “nature, type, class.” Kindred entered English in the early 13th century.
how is kindred used?
Garth’s look feels rummaged out of a costume trunk—bedraggled blond wig, Buddy Holly glasses, mom jeans—but Carvey plays him with such feline sensitivity that l have always recognized him as a kindred spirit.
Amanda Hess, «‘Wayne’s World’ & Me,» New York Times, July 2, 2020
“I think he’s lovely,” said Anne reproachfully. “He is so very sympathetic. He didn’t mind how much I talked—he seemed to like it. I felt that he was a kindred spirit as soon as ever I saw him.”
Lucy Maud Montgomery, Anne of Green Gables, 1908
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kindred
4 Apr /13
Moore was a co-founder of Intel. He made a prediction which actually came true. As a co-founder of Intel, he knew what he was talking about. In a paper published in 1965, he wrote that “the complexity for minimum component costs has increased at rate of roughly a factor of two per year”. He continued by saying that “this rate can be expected to continue, if not to increase”.
For you and me, this means computers get faster, mobile phones get smaller, computer games become more realistic.
It took a several years and many changes before Moore’s comments were translated into what is known as Moore’s Law. Moore’s Law apples applies to the number of transistors on integrated circuits doubling every two years, resulting in the performance of computing increasing. From the very start, the big question wass how long Moore’s Law would actually apply. Again and again there were predictions that computing would reach the capacity limits. These forecasts have not yet come true. But Intel once again is warning investors that it sees the end of the line for Moore’s Law. Perhaps the best judgement on Moore’s Law was made by Moore himself, as he admitted, “Frankly I didn’t expect to be so precise”.