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Last-Survivor Life Insurance

Last-survivor life insurance has been a popular estate conservation tool for couples who want to help ­protect their legacy from estate taxes. Because this type of policy pays a benefit after the death of the last-surviving insured individual, it can provide heirs with much-needed cash to help cover final expenses, probate costs, and estate taxes.

Of course, fewer households will be subject to the federal estate tax in 2011 and 2012 as a result of the 2010 Tax Relief Act. The law reinstated the federal estate tax retroactively to January 1, 2010, with a 35 percent tax rate, but it applies only to estates valued at more than $5 million.* It also allows for "portability" of the deceased spouse's unused exemption between spouses. However, because the provisions of the act expire after December 31, 2012, the portability provision will end, the exemption amount will fall to only $1 million, and the top tax rate will jump to 55% starting in 2013, unless Congress changes or amends the current tax law. Also, many states have their own estate taxes, most with exemptions of $1 million or less, and none currently has any portability provisions.1 Many financial experts agree that the only way to deal with this uncertainty is to have an estate conservation plan in place.

As a result of the unlimited marital deduction, when one spouse dies, his or her entire estate passes to the surviving spouse without becoming subject to estate taxes. (The surviving spouse must be a U.S. citizen.) When the second spouse dies, federal estate taxes come due on whatever portion of the estate exceeds the prevailing exemption amount.

Because estate taxes are typically due within nine months of the surviving spouse’s death, heirs could be forced to sell property, liquidate other assets, or take out a loan in order to make the payment on time. The benefit from a survivorship life insurance policy can help provide funds so the heirs can pay the bill rather than dipping into their inheritance.

The cost and availability of life insurance depend on factors such as age, health, and the type and amount of insurance purchased. Before implementing a strategy involving life insurance, it would be prudent to make sure that you are insurable. As with most financial decisions, there are expenses associated with the purchase of life insurance. Policies commonly have contract limitations, fees, and charges, which can include mortality and expense charges.

Many people work and save throughout their lives to leave a legacy to their loved ones. Survivorship life insurance can help safeguard the assets they’ve worked hard to build.

* Executors for the estates of decedents who died in 2010 have the option of electing to use the 35 percent rate, $5 million exemption, and "stepped up" basis for income tax purposes of assets, or zero estate tax liability with "carry over" basis for income tax purposes of assets.

1, January 5, 2011

The information in this article is not intended to be tax or legal advice, and it may not be relied on for the purpose of avoiding any federal tax penalties. You are encouraged to seek tax or legal advice from an independent professional advisor.
This material was written and prepared by Emerald. © 2012 Emerald Connect, Inc.