Estate Planning Attorneys Recommend Life Settlements to Help Clients Achieve Their Estate Planning Goals

Estate attorneys are often the first member of the client’s team of professional advisors to identify the problem-solving potential of life settlements.

As noted in this case summary, the attorney felt it was his fiduciary duty to recommend selling an unwanted policy in order to preserve the cash assets in his client’s estate.

Although purchasing life insurance as part of a client’s initial estate plan is considered a necessary and prudent strategy, over time the client’s need for income protection declines. Once the client’s family is grown, large life insurance policies often become irrelevant.  The sensible solution is to sell the policy in the secondary market to generate cash liquidity that can be utilized to achieve other objectives in the estate plan.

That’s why many estate attorneys and fiduciaries are incorporating life settlements as a strategic solution for insurance coverage no longer needed to achieve the client’s legacy planning objectives.

 

The scenarios below illustrate estate planning scenarios where a life settlement might be the most advantageous solution for the client:

Trust-Owned Life Insurance

Universal Life Insurance policies held in ILITS may not be performing satisfactorily due to the sustained low interest rate environment. Premium payments for underperforming policies may be draining investable capital from the estate and putting the client’s cash assets at risk. In many such instances, a life settlement is a viable solution. (Click here to read our blog titled “What Professional Advisors Should Know About Trust-Owned Life Insurance.”)

Key Man Insurance for Retiring Business Owners & Executives

Small businesses purchase key man insurance to protect against unforeseen losses in the event of death or disability of a particular key employee. Instead of dropping or lapsing the coverage when a key man retires, the preferred alternative would be to sell the policy and use the cash proceeds to pay off company debt, add revenue to the company, or transfer ownership to the key executive as part of his/her severance or retirement package. (Click here to read our blog titled “Retired Business Own Sells $10M COLI Policy for $600K”)

Insurance Purchased for Estate Taxes

 In light of the 2017 Tax Cuts & Jobs Act which doubled the estate tax exemption to $11.2 million per individual ($22.4 million for couples), many life insurance policies that were purchased for estate tax purposes are now obsolete. The cash proceeds from a life settlement can be used for new investments or to help pay for quality long term care. (Click here for explanation of the new (more favorable) tax implications for life settlements as provided by the 2017 Tax Act.)

Bankruptcy

Bankruptcy trustees are discovering the role of life settlements in bankruptcy proceedings as more professional advisors deploy this method to monetize assets to pay creditors. According to Bloomberg BNA, Title 11, Section 363 of the U. S. Code provides the authority for the secondary market sale of life insurance in order to maximize recovery for an estate and its creditors.

Divorce

As clients go through divorce, estate and family attorneys must address the disposition of life insurance that had originally been purchased as income protection for the spouse. Proceeds from a life settlement are often used when marital assets are divided.