Legacy planning with life insurance offers a strategic avenue for individuals to not only reposition their assets but also to cultivate a lasting financial legacy for their loved ones and charitable causes. By harnessing the power of life insurance policies, individuals can optimize their wealth distribution, ensuring that their assets are efficiently passed on to future generations or designated charitable organizations. This proactive approach not only safeguards the financial well-being of beneficiaries but also empowers individuals to leave a meaningful impact that extends far beyond their lifetime, fostering a legacy of prosperity and philanthropy.
We recently met with Jim, a retired surgeon with two kids, four grandkids, and a big dilemma. He had accumulated substantial assets during his working years, and now he had to decide how to give them away. On the one hand, he wanted to take good care of his family and make sure money was available to fund educations, real estate, or whatever else the younger generations may need. On the other hand, Jim had become quite attached to several charities during his retirement and wanted to maximize his support for them.
We told Jim something he had a hard time believing: By repositioning his assets and using the leverage and tax benefits associated with life insurance, he could actually give his estate away twice—once for his family and once for the benefit of charity. Here is an example of how this strategy plays out.
Giving Away Your Estate Twice
If you and your spouse have a $10 million estate, you would currently be under the current federal exemption level of $23.4 million per couple. However, even without the burden of federal estate tax, you might still struggle with the idea of splitting your legacy between your children, other heirs, and your favorite charities.
Our recommendation would be to establish an irrevocable life insurance trust (ILIT) and have the trust purchase a life insurance policy equivalent to your estate value. That means, if you have a $10 million estate, then you buy a $10 million policy. For a healthy couple in their 60s, that policy may only cost $2 million up front, an amount you can gift to your trust using your lifetime exemptions.
When you pass away, the $10 million death benefit would pay income and estate tax-free into the trust. Your trustees can then pay that money out to your heirs according to the terms of the trust.
You may be thinking, “Well, that’s great, but how does this strategy give your estate away twice?” Remember that it only cost you $2 million to fund the $10 million life insurance policy for your family, so the other $8 million has been growing and accumulating interest for many years.
Even if you took occasional withdrawals to cover living expenses, that $8 million has probably grown back to $10 million or perhaps much more than that. All of that money can go to charity and support programming that will last for many decades into the future, but you won’t need to feel guilty because the full proceeds of the life insurance policy have gone to your family.
Maximize Your Legacy Planning with Life Insurance
Just to put the efficiency of this strategy into some context, imagine the same scenario if you didn’t create and fund a life insurance trust well in advance. That same $10 million would be split between family and charity. It may be even less if you let all of the money linger in stocks and the market gets caught in a nasty correction around the time of your death.
The trick to maximizing your legacy is to plan for it decades ahead of time. Life insurance strategies are incredibly tax efficient and use leverage that can help pass along more money than you may realize is possible. Like in the above example, buying a life insurance policy equivalent to your estate value allows you to give your estate away twice.
Our life insurance advisors have pioneered many similar strategies that are widely practiced throughout the life insurance industry today. Contact us about your life insurance concerns by calling 800-DIE-RICH, and let us help you as well.
