We all know that life insurance can provide vital replacement income for family members after a loved one passes. But life insurance is more than just a posthumous income source. It can also be a delicate tool with which to carve out one’s legacy. And for charity-minded individuals, life insurance can ensure that their philanthropic initiatives live on in a tax-advantaged manner long after they’re gone. Here is a closer look at some of the legacy-building ways that life insurance policies may be used.

Keeping Businesses Alive

At first glance, you might think that life insurance has little to do with business succession planning. But consider the following scenario. Family patriarch “Charles” is a wealthy business owner, with three sons. However, only two of his kids have historically shown interest in carrying the business forward. The third son? Not so much. And while Charles wants all three sons to experience fair treatment after his death, bequeathing his business in equal thirds is a recipe for trouble. The apathetic son is likely to be viewed as dead weight, squabbles can arise, and the business is bound to suffer. (For more, see: Estate Planning Tips for Financial Advisors.)

Alternatively, by giving the third son a cash payout through a life insurance policy, rather than equity in the business, Charles’s enterprise is infinitely more likely to survive the transition and thrive over the long term. Simply put: finesse is called for when dealing with often-thorny family dynamics, and a sound life insurance policy can ensure this.

Charitable Giving With Purpose

According to data from charitable advocacy and research group The Giving Institute, in 2015 charitable donations in America hit record levels with an estimated $373.25 billion in contributions. And while most charitable individuals give to their pet causes on a monthly or annual basis, wealth management professionals who help clients leverage life insurance capabilities can help them amplify the effects of their giving.

Case in point: if 65-year-old Brenda makes $10,000 in contributions to a hospital in a third-world nation, her total charitable gift over the next 20 years would be $200,000 - perhaps enough to afford a new CT Scan machine. Alternatively, if Brenda contributes to a life insurance policy with $10,000 annual premiums over the same 20 years, her total gift could reach more than $1,000,000—enough to equip an entire pediatric unit with medical gear. The latter scenario is made possible because the current annual gift tax exclusion (gifts that may be made without triggering a tax consequence) is $14,000. Therefore, by employing an irrevocable life insurance trust (ILIT) to purchase life insurance with her annual $10,000 gift, the ILIT can be doled out to whatever person or charitable cause Brenda stipulates in her will - free of income and estate tax. (For more, see: How Life Insurance Can Help Reduce Estate Taxes.)

Legacy Planning’s Taxing Issue

As a partial resolution to the fiscal cliff from several years back, President Barack Obama signed into law the American Taxpayer Relief Act of 2012, which extended earlier tax relief programs. Consequently, fewer people are experienced shrinking estates due to tax burdens, causing many to wonder if they still need the tax efficiency of life insurance.

But many financial planners believe these tax exemptions shouldn’t overshadow the importance of life insurance as it relates to legacy planning. This is especially true with retirees with significant income beyond the assets socked away in their individual retirement accounts (IRAs). When such retirees hit the age of 70½, and must begin taking required minimum distributions (RMDs) from their IRAs, the after-tax assets can be allocated to paying premiums on personally-owned life insurance or insurance owned by an irrevocable trust, setting up their loved ones with fiscal security. Known as an “inherited IRA” this method of transfer is yet another legacy planning tactic available to consumers.

The Bottom Line

Life insurance isn’t just a blunt tool for passing assets from one generation to the next. Carefully managed, life insurance can protect and preserve one’s legacy, long after death. (For more, see: Tips for Helping Clients with Life Insurance Needs.)

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