Historically life insurance used in estate planning has revolved around the issue of estate taxes, with the irrevocable life insurance trust being the stop gap to keep the government from draining off half the value in fairly liquid estates and sometimes completely gutting estates with very low liquidity.
With the downturn in the economy over the past year, the value of many estates that were borderline taxable has fallen to the point where some are considering whether estate protection is needed. Another thing that has pushed on that already leaning tree is the fact that congress appears to be seriously poised to lock in the estate tax exemption at next year’s already legislated level of $3.5 million.
Before you bag that life insurance there may be a few things you want to consider. First of course is the fact that economic downturns historically don’t last and value lost will likely be regained. And, while the new exemption limits may seem temptingly high enough to consider foregoing protection, a turn around in real estate and investments, coupled with a few right choices can put your estate right back in the governments hip pocket.
Another thing to consider for those estates that were borderline taxable at the lower exemption limits and seem safely padded if the exemption goes to $3.5 million, is the idea of keeping that irrevocable life insurance trust in place as a wealth preservation tool. It could be that extra million or two that makes your estate “economy proof” should you happen to suffer more losses or die during an economic slowdown.
Bottom line. That in force life insurance has value to your estate in several ways and they should all be considered before any firm decision is made to lapse something that may have huge value down the road.