Part 6: Life Insurance
By Robert L. Bolick, Esq.
This article is the last in a six-part series on simple and reasonable steps you can take to protect your assets. This issue focuses on how to protect the cash value of your life insurance.
With the flurry of lawsuits today, more and more physicians are looking for ways to protect their hard-earned assets. The following is a brief discussion of how to protect your life insurance.
Can I Protect the Cash Value of My Life Insurance?
Yes. An asset often overlooked in asset protection planning is the cash value of life insurance. If not otherwise protected, this is an asset that a creditor could attach. Fortunately it is a very easy asset to protect.
If you are not concerned about estate taxes, you can have your policy owned by your family limited partnership (FLP) or other entity as your holding company for investment assets. Structured properly, your FLP will protect your assets.
If you would also like to protect your life insurance proceeds from taxation by the IRS, you should consider using an Irrevocable Life Insurance Trust (ILIT).
How Can an Irrevocable Life Insurance Trust Protect Me?
Most people are aware that life insurance proceeds pass to their beneficiaries income tax free. Unfortunately, the same is not true for estate taxes. All life insurance proceeds on a policy you own will be included in your taxable estate at your death, regardless of who you name as a beneficiary. With estate tax rates beginning at 43% for the first dollar over $1,000,000 (in 2011) and climbing to 55%, this truly would be a tragedy. Fortunately, paying estate taxes on life insurance is unnecessary and can be completely avoided with proper planning.
How Can I Exclude My Policy From Estate Taxes?
Quite simply, by creating an irrevocable life insurance trust (ILIT) and transferring your policy to the trust, all of the proceeds will be excluded from your taxable estate. If you transfer an existing policy, you must live for at least three years after you make the transfer to achieve the favorable tax treatment. If you purchase a new policy through an ILIT, there is no three-year survivorship requirement. Either way, the cash value of your policy is protected immediately.
Are There Any Drawbacks in Creating an ILIT?
The only potential disadvantage to transferring a policy with cash values (as opposed to a term policy) is that you cannot be a direct beneficiary of the cash values. Your spouse and/or children would be the only ones who could receive cash values directly from the trust.
Final words to the wise: Don’t delay. The sooner you get your protection in place, the better. Life is too short to constantly worry that all of your years of schooling, training, scrimping, saving and hard work could all vanish overnight.
Robert L. Bolick is the senior partner in the law firm of Durham Jones & Pinegar in Las Vegas, where he has practiced for over 23 years. His primary areas of practice are asset protection and estate planning. Mr. Bolick has an “A/V” rating from Martindale-Hubbell, the highest professional rating for an attorney. He is listed in “Nevada Super Attorneys” (top 5% in his field). He was named Outstanding Estate Planning Attorney of the Year by the Nevada Business Journal. He has authored numerous articles and publications on asset protection and estate planning, and is a frequent lecturer on these topics. Mr. Bolick is a member of the State Bars of Nevada, California, Arizona, Utah and Hawaii.