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5 Key opportunities for survivorship universal life in legacy planning

The recent tax legislation — which, as most of us know, provides a $5 million estate/gift/generation-skipping transfer tax exemption — has prompted many agents to refine their approach to the broader market for estate planning.

Rather than focusing on an estate tax-driven approach, these agents have returned to more fundamental, non-tax reasons for planning. In doing so, they are finding a place for both single life and survivorship life insurance as part of their clients’ legacy plans. In particular, competitively priced survivorship universal life policies (SUL) are becoming increasingly popular.

Below are five scenarios that show how survivorship universal life insurance can help you and your clients with legacy planning.

1. Special needs planning

If your client cares for a loved one with special needs, it’s important to prepare for the future. This includes the possibility that your client may not always be able to provide the specialized care this person needs. Even if another member of the family such as a sibling is willing to assume the duties of caregiver, it is important to provide for the management of assets.

Clients in this situation should consult with an estate planning lawyer to properly draft a special needs trust and coordinate it with their overall estate plan. The objective of a special needs trust is to supplement the child’s inheritance, not to replace government programs. These trusts usually contain provisions allowing an independent trustee to distribute funds to someone with special needs, while preserving their rights to other forms of assistance. 

Survivorship universal life is often used to anchor the funding for the special needs trust. Clients may also have single life policies inside the same trust to establish a baseline of protection at the death of the first spouse. In such cases, SUL complements the individual life protection.

2. Estate equalization

Suppose you have a client who owns a small family business and has two children. Child No. 1 works for the family business, while the second child pursued a different career path. In such a situation, the client may want to give the business to the child who is involved, and then equalize the inheritance for their second child at the time of the client’s death.

One solution is for the client to establish an irrevocable life insurance trust and fund it with insurance. SUL is often a good fit because the policy pays theproceeds on the second death, which is usually when parents wish to equalize the inheritance.

3. Charitable giving

Many of your clients may have charitable giving intentions as part of their overall legacy plan. For these clients, life insurance — especially permanent forms of life insurance, such as SUL policies — can make a great gift. 

In many cases, the client may simply name the charity as beneficiary of the policy, thereby preserving control over any cash value. In addition, the beneficiary can be changed at any time. With this approach, clients are not entitled to any ongoing income tax deductions for premiums paid, but they will continue to have control over the policy, which may be important to them.

Another option is to permit the charity to apply for and own the insurance. In this instance, the clients contribute the premium and may be entitled to an income tax deduction as a result. However, the insurable interest rules must be followed in the issued state. Some states allow a charity to initially purchase a policy, generally with consent of the insured; other states do not allow the original purchase. In these states, the policy can generally be purchased by the insured and then gifted to the charity.

4. Income replacement for children of dual-income households

With increasing costs of education, health care and general living expenses, income replacement is as important as ever for children, especially in dual-income households. Single life policies may cover the death of the first working spouse and be combined with survivorship universal life protection to supplement any other coverage in force at the death of the second working spouse.

5. State inheritance and estate/income taxes related to annuities and retirement plans

Certain states impose inheritance or estate taxes, and tax planning may be important for clients living in these states. For many, income taxes on inherited retirement plans, 401(k) balances and gains in nonqualified annuities may create significant costs. To offset these costs to either the estate or the beneficiaries, clients may wish to purchase life insurance, or establish an irrevocable life insurance trust and fund it with SUL. This will provide liquidity that can offset these tax burdens.

In conclusion

It’s no secret that, for larger estates (over $5 million individually or $10 million per couple), SUL continues to have great importance.  But as we’ve seen, it can be just as important for the broader market. These scenarios offer agents a great opportunity to approach your clients and determine whether SUL may be effectively incorporated into their legacy plans.  «

Brett W. Berg, JD, LLM, CLU, ChFC, currently serves as director, advanced marketing for The Prudential Insurance Company of America, headquarted in Newark, NJ. 


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