Second-to-die life insurance, also called survivorship life, is most closely associated with the payment of federal estate taxes. In fact, it is accurate to say that such policies were created for that specific purpose.
This is an industry, however, that is hard to match for its imagination in the application of the products that we have to offer. In that regard, here are nine creative uses that have been developed for survivorship policies.
Estate tax liquidity: In the area of tax-oriented estate planning, a husband and wife will typically draft their wills using the bypass trust/marital deduction approach, which postpones all federal estate tax until the second death. Consequently, a life insurance contract is needed that pays the death benefit on the second death when the tax becomes due. A second-to-die contract is perfect for this purpose and is usually purchased though an irrevocable life insurance trust, or ILIT, to prevent the death proceeds from being included in the insured's gross estate.
Business buy-sell agreements: If a business is owned by a husband and wife and they both intend to stay active until they die, the sale of the business to a new owner should take place on the second death. In such a situation, the husband and wife would enter into a buy- sell agreement with the prospective purchaser, and the agreement would say that the sale would take place upon the second death of the husband and wife. To fund the purchase, the prospective buyer would acquire a second-to-die policy on the husband and wife.
Funding for children with special needs: If two parents have a child with special needs, the greatest risk to the child comes after both parents are dead. To deal with this problem, the parents can establish a special-needs trust funded with a second-to-die policy on the parents. The trust language makes the child a discretionary beneficiary of the trust, which means the child can only receive what the trustee chooses to give the child. Consequently, since the child cannot demand any benefits from the trust, the assets of the trust can not be considered the child's assets, and the child can not be disqualified from receiving needs-based government benefits, such as Medicaid.
Dynasty trusts: In today's world, children do not expect to do as well as their parents. This means that for the first time in American history the American Dream is gone from the minds of upcoming generations. The result is that, besides educating their children, parents need to start thinking about establishing dynasty trusts to take care of future generations. This is done by having the parents establish an irrevocable life insurance trust funded with a second-to-die policy on the parents. After the parents are both gone, the trust collects the death proceeds and, thereafter, acts as a family bank for generation after generation. As such, the trust can loan money to the descendants to purchase homes or start businesses. It can also provide funds for educational or medical expenses or any other family needs.
Wealth replacement trusts: If parents want to give to a charity, they might be hesitant because they are concerned that their children will resent having a part of their inheritance given away. To solve that problem, the parents can establish an irrevocable life insurance trust funded with a second-to-die policy on their lives. This way, when the parents die, the children will get income and estate tax-free death proceeds from the trust instead of the property that was given to charity.
