The Survivor

Published in Financial Advisor, May 2017

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Part of Overall Estate Planning

Whatever the benefits, many experts stress that survivorship insurance must be well integrated into a larger, complete estate plan. And as part of that planning, you need to make sure the death benefits aren’t included in the taxable estate. “Life insurance that is used to cover estate-tax exposure should, in almost all cases, be owned by a trust,” says Jose Reynoso, a managing director at Clarfeld Financial Advisors in Tarrytown, N.Y.

In most cases, Reynoso recommends using an irrevocable life insurance trust (ILIT). If structured properly, the ILIT would own the life insurance policy, thus removing it and its proceeds from the taxable estate while still allowing the proceeds to be available for heirs. The grantor can still name the beneficiaries and the trustee to manage the account and can dictate rules to govern the use of insurance proceeds. He or she just cannot own the policy. Such a trust, says Reynoso, provides “asset protection and other tax benefits.”

Nevertheless, he is not a fan of second-to-die policies. “Compelling after-tax, economic and planning arguments can be made for using single-life policies today, even at potentially higher aggregate premiums,” he says.

Reynoso cites the advantages of immediate income-tax-free and estate-tax-free liquidity at the first death, which could be important for a surviving spouse who is in danger of using up much of his or her savings. The policy could still be owned by a trust to provide asset protection, or proceeds could be used “to cover any taxes that might result from an alternative tax regime that could replace the existing estate tax system,” he adds. “Even if the liquidity is not necessary during the life of the surviving spouse, the insurance proceeds from two single-life policies can often provide a bigger benefit at the second death than a second-to-die policy, at a lower overall cost.”

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