Survivorship life, although a useful tool, is not a solution for all estate planning needs. In many cases complicating factors may make survivorship life alone an insufficient tool to meet estate liquidity needs and asset transfer objectives. Single life insurance is often needed when use of the maximum marital deduction is inconsistent with wealth transfer objectives. For instance, if a significant estate tax liability is anticipated at the first death, it is obviously important to continue to hold individual insurance on the life of each spouse. If one anticipates first death costs to be minor, the cash surrender value on the SL policy may be available to provide liquidity to the surviving spouse to handle these costs. In many SL plans, the cash surrender value under the SL policy increases dramatically at the death of the first spouse. This substantial cash surrender value may alleviate any liquidity problems caused by first death costs.
Advisers also may recommend single life insurance in other circumstances. For example, in some cases one spouse wishes to provide for children from a prior marriage at his or her death without having to wait until the subsequent death of the spouse. In these cases amounts transferred outright to children are included in the deceased’s estate. Single life insurance can provide the necessary cash to pay estate taxes without the need to liquidate estate assets, thus preserving the assets for the children.
Advisers also may suggest keeping assets with substantial appreciation potential out of the surviving spouse’s estate. In such cases, one could use life insurance on the first-to-die (payable to an irrevocable trust or a family partnership) to purchase the assets. Under current law, the income tax on any unrealized gain at the time of the first death is avoided because the assets receive a step-up in basis. If, as is commonly the case, the insurance proceeds are invested to provide income for the surviving spouse and the appreciation potential of the assets is substantially greater than any accumulated income on the insurance proceeds, the differential in value avoids estate taxation at the second death.
Reproduced with permission. Copyright The National Underwriter Co. Division of ALM