Funding Life Insurance Outside of an Estate: Leveraging Unified Credit and Gifting Exemptions
Introduction
Life insurance is a critical component of estate planning, providing financial security to the beneficiaries after the insured’s death. However, estate taxes can erode the death benefits, making it essential to utilize strategies such as the Unified Credit and Gifting Exemptions to fund life insurance policies outside the estate. The Indexed Universal Life (IUL) product line offers attractive features such as guaranteed death benefits, guaranteed premium structures, and cash value accumulation, enhancing the overall value of these policies.
Unified Credit and Gifting Exemptions
The Unified Credit (also known as the lifetime gift tax exemption) allows individuals to gift a specific amount during their lifetime without incurring federal gift taxes (Tax Policy Center, n.d.). As of 2023, the exemption is $12.92 million for an individual and $25.8 million for a married couple. However, the Tax Cuts and Jobs Act (TCJA) has provisions that sunset after December 31, 2025, which may significantly reduce these exemptions (Internal Revenue Service, 2017). Estate planners should carefully monitor the regulatory landscape and utilize these exemptions to fund life insurance policies while they are still available.
One effective strategy for leveraging the Unified Credit is to establish an irrevocable life insurance trust (ILIT). By transferring ownership of the life insurance policy to the ILIT, the policy is removed from the estate, reducing the estate’s taxable value and ensuring that beneficiaries receive the maximum death benefits. The trust’s grantor can use the annual gifting exemption, currently set at $17,000 per recipient, to fund the policy premiums (Tax Policy Center, n.d.).
Indexed Universal Life (IUL) Products
IUL policies are an attractive option for funding life insurance outside an estate due to their multiple advantages. First, IUL policies offer guaranteed death benefits, ensuring that beneficiaries receive a predetermined amount, irrespective of the policy’s cash value or market performance. This provides peace of mind and financial security to the insured and their loved ones.
Second, IUL policies have guaranteed premium structures, which lock in the premium costs for the policyholder. This ensures that the policy remains affordable and predictable throughout its duration, providing long-term financial stability.
Lastly, IUL policies are cash value-rich contracts, meaning they accumulate cash value based on the performance of a selected market index, such as the S&P 500. This allows policyholders to enjoy potential growth in their cash value while being protected from market downturns, as the policy’s cash value will never decrease due to poor market performance (Investopedia, 2021).
Conclusion
By leveraging the Unified Credit and Gifting Exemptions to fund life insurance policies outside the estate, individuals can provide a secure financial future for their beneficiaries while minimizing estate taxes. The Indexed Universal Life product line offers multiple advantages, such as guaranteed death benefits, guaranteed premium structures, and super cash value accumulation, making them an attractive choice for this strategy. As the sunset of the TCJA looms, estate planners should act promptly to take advantage of the current tax exemptions and secure their clients’ legacies.
References
Internal Revenue Service. (2017). Tax Cuts and Jobs Act. Retrieved from https://www.irs.gov/tax-reform
Investopedia. (2021). Indexed Universal Life (IUL) Insurance. Retrieved from https://www.investopedia.com/terms/i/indexed-universal-life-insurance.asp
Tax Policy Center. (n.d.). What is the gift tax? Retrieved from https://www.taxpolicycenter.org/briefing-book/what-gift-tax
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