Life insurance has long been used as a tool for estate planning. It has the unique ability to satisfy a wide range of objectives including covering outstanding debt obligations, paying for burial expenses, providing for surviving family members, and offering liquidity to cover estate taxes.
For larger estates, life insurance is a critical component used to offset the impact of estate taxes, particularly those with illiquid assets. For example, if a family has a valuable business or raw land, the estate tax may be large when the asset is passed to future generations. Unfortunately, there may be no market to sell the asset to cover the estate tax bill, or the family may want to keep the asset and suddenly be forced to come up with the cash to pay the tax bill. In these scenarios, cash is critical to ensure beneficiaries do not need to come out-of-pocket or illiquid assets do not need to be sold at fire-sale prices to keep the estate afloat. Life insurance can be used to provide the liquidity in such situations.
In 2017, a federal tax applies to the portion of an estate’s value that exceeds $5.49 million for an individual. President Trump has indicated he will soon be proposing a number of tax reforms; one such initiative is to replace the estate tax with a capital gains tax that is applied when heirs sell assets out of the inherited estate. Families are able to pass along more of their wealth, but it comes with a built-in tax liability that is realized if the asset is sold for a profit.
This proposed change to the federal tax code could have major implications for the strategy of using life insurance as an estate planning tool. Now is the time for seniors to understand their options if the estate tax is repealed.
A well-suited option for many could be a life settlement. A life settlement is the sale of an existing life insurance policy to a third party for more than its cash surrender value, but less than its death benefit. A change in the tax code may eliminate the need for insurance, making excess coverage unnecessary. A life settlement is an attractive alternative to lapsing it to the insurance carrier for the cash surrender value. On average, a life settlement yields seniors seven times the amount of the policy’s cash surrender value, according to analysis of a survey by the U.S. Government Accountability Office. These resulting funds can then be used to fund the estate or invested in a different manner.
To find out more about life settlements, visit lisa.org.
About the Author
Mr. Young is a Senior Managing Director & General Counsel at Vida Capital. In addition to his role at Vida, Mr. Young is an adjunct professor of Regulatory Law at the University of Texas Law School, Chairman of the Board of the Institutional Longevity Markets Association (ILMA), Board Member of the Life Insurance Settlements Association (LISA), a monthly blogger, and a frequent speaker at life settlement industry conferences.
Prior to joining Vida Capital, Mr. Young was President & CEO of NFP Securities as well as New York Life’s Broker-dealer network and New York Life’s Registered Investment Adviser. He began his career as a clerk on the Third Circuit Court of Appeals before practicing at Cravath, Swaine & Moore in New York. Mr. Young holds multiple securities licenses (Series 7, 24 and 63) and insurance designations including Chartered Life Underwriter (CLU), Chartered Financial Consultant (ChFC) and Chartered Advisor for Senior Living (CASL).
Mr. Young currently serves on the Board of Directors for the Austin Habitat for Humanity. He graduated from Stanford University with Honors and Distinction in 1989 and from the University of Chicago Law School with Honors in 1992.