The Role of Insurance in Wealth Management

Most people spend their whole lives accumulating assets and building wealth with the intention of providing their family financial security. With this wealth transfer in mind, it is important to know how to use trust services and life insurance. For one thing, without insurance the IRS can potentially become an unwanted beneficiary of your estate when you die. So, let’s take a look at how this can be minimized and, in some cases, avoided.

When a spouse passes away, estate taxes can be due within nine months. In some cases, there are also costs that are due earlier. To meet these tax obligations, some families will borrow against assets or liquidate those assets, but it doesn’t have to be that way.

One popular way of addressing your wealth transfer goals is by using irrevocable trusts funded with life insurance.  There are two basic types of trusts revocable and irrevocable. For the purposes of wealth transfer it is important to focus on irrevocable trusts (also known as gift trusts), as assets held in these trusts are not included in your taxable estate for estate tax purposes. With an Irrevocable Trust the trustee controls how assets are managed, has legal control over the assets determining how they are distributed and used, has a fiduciary responsibility to act in the best interest of the beneficiaries, and the terms can’t be altered without legal proceedings. The key point being that the assets in the irrevocable trust are held outside of your estate. This is not a complete list and you should discuss the differences with your estate attorney to be certain that the trust they draft for you aligns with your specific goals.

Utilizing insurance strategies can help to manage risk and provide liquidity for you to pay estate taxes or other expenses. If the insurance has been structured properly it creates a financial safety net and the policy’s death benefit will be excluded from the insured’s taxable estate for transfer tax purposes. Additionally, because life insurance proceeds are free from any income tax, effectively your beneficiaries will receive the money tax free.

There are two basic types of life insurance options. Term life insurance lasts for a specific pre-determined period of time, while permanent life insurance lasts your entire lifetime as long as the premiums are paid. Term life is an affordable solution for temporary short-term needs like paying off a mortgage and it can provide income replacement during peak earning years or while raising a family but it has no residual value at the end of the term. Permanent life provides lifelong death benefit protection, protects your family by providing financial security upon your death, can fund final expense at death and builds cash value that accrues over your lifetime. This can provide a way for people to save for future expenses such as retirement or college tuition.

Benefits from a life insurance policy can help cover expenses such as mortgage payments, paying off debt like car loans, living expenses and credit cards, and funding future education costs for children. It’s important to name beneficiaries because by doing so you will alleviate the burden of your death on loved ones and allow them to grieve without having to worry about financial matters. Furthermore, life insurance can be used to make a substantial charitable gift by naming a charity as the beneficiary of a life insurance policy.

In addition to insurance there are other important elements of estate planning to become familiar with such as The Federal Estate Tax Exemption. This is a specified amount that is exempted from estate tax and is reduced dollar for dollar. For example, in calendar year 2023, the federal exemption amount is $12,920,000 per person or $25,840,000 per married couple. That means that if your estate is valued at $50 million, the first $25,840,000 (for a married couple) is not subject to estate tax but the balance of approximately $24,160,000 will be subject to estate tax. This is where insurance becomes very valuable as the insurance will pay into the estate to pay some of the estate taxes due and then the heirs will not be forced to sell assets to pay the estate taxes.

Additionally, everyone gets the opportunity to make an annual gift to anyone they want to and the amount can vary from year to year. In 2023 that annual gift amount is $17,000. The annual gift is not counted against your lifetime exemption.

From a business standpoint insurance will protect your business from the unexpected. If you own a business, you can take out life insurance policies to protect it. You can set up a buy/sell succession strategy, create a business loan collateralization plan and have key person protection. For example, in case of the death of a key member of the team the death benefit can be used to buy out the deceased owner’s share of the business, ensure that the business continues normal operation of the company providing financial security for your family.

Many of us will need long-term care when we get older. To cover long-term care costs, some individuals buy life insurance policies with long-term care riders. These can provide financial assistance for care in the event of a chronic illness or disability thus preserving the value of an estate. This long-term care insurance either as a rider or as its own policy has become very popular since more people are living longer.

Finally, not only will you have peace of mind knowing your family will be taken care of but owning a life insurance policy will also give your family members peace of mind knowing they will be taken care of in the event of your death. This can be especially important for individuals with dependence on those who are the primary breadwinner in their families.

As you can see, it’s very important to plan ahead and it’s never too early to start these discussions. By including insurance as part of your overall estate plan, you can ensure that your assets are used as you intend so your beneficiaries are provided for in the way you choose, which can help maintain the value of your estate.

The role of your financial advisor is to work with you and other professionals to help you make good choices in choosing the proper insurance, identifying products and solutions that help you pursue your investment goals, and give you access to trust services. And lastly, remember to seek a qualified estate planning attorney and a tax professional to join your team to develop your comprehensive wealth transfer planning

Rebecca Rothstein works with high-net-worth individuals, families, and institutions, helping them advance their wealth management goals. She began her career as a financial advisor in 1987 at Bear Stearns. She spent 10 years with Deutsche Bank Alex Brown and 13 years with Morgan Stanley Private Wealth Management (formerly Smith Barney) before joining Merrill Lynch. As a Managing Director at Merrill Private Wealth Management, Rebecca focuses on wealth management, tax minimization, and estate planning strategies for affluent clients. She also works with corporate officers, devising liquidity and diversification strategies for concentrated positions. Rebecca has garnered a number of national honors as a financial advisor. Barron’s magazine named her one of the “Top 100 Financial Advisors in America” from 2007 successively through 2012. Barron’s also named Rebecca one of the “Top 100 Women Financial Advisors in America” from the inception of the list in 2006 successively through 2012, profiling her in the 2012 issue. In 2017, Rebecca was recognized by the national publication Forbes, which named her one of “America’s Top Wealth Advisors.” In 2018, 2019, 2020, and 2021 Rebecca was again recognized by Forbes, which named her the #1 of “Top Women Wealth Advisors.” Rebecca is very active in the community. She is the Chairman of the Board and Founder of Teen Cancer America (a global charity founded by Roger Daltrey and Pete Townshend). She is also a Co-Chair of the Childhood Autism Board at UCLA, which helps children who have been diagnosed with autism, developmental disabilities, and behavior disorders, and she is a board member of the UCLA Health System. In her free time, Rebecca enjoys cooking, sailing, and participating in a number of charitable efforts. She has four sons and splits her time between Incline Village, Nevada and Beverly Hills, California with her husband Ron.