When it comes to estate planning, one important aspect to consider is the protection of your life insurance policy from creditors. Many people are unaware that their life insurance policy may not be protected from creditors and that it can be considered a countable resource for Medicaid purposes. However, there are ways to ensure that your life insurance policy is protected.
One way to protect your life insurance policy from creditors is by holding it in an Irrevocable Life Insurance Trust (ILIT) or an Asset Protection Trust. This can provide an extra layer of protection for the cash value of your policy, ensuring that it remains safe from creditors. Additionally, holding your policy in an ILIT or Asset Protection Trust can also help to manage the policy during a period of disability.
Another important aspect to consider is the potential impact on Medicaid. The cash value of a life insurance policy is not considered a countable resource for Medicaid purposes, as long as it is less than $15,000. However, once the cash value is cashed out or spent down, it can be considered a countable resource.
It's also important to keep in mind the potential impact on estate taxes. Currently, the federal estate tax exemption is $5 million, but this can change at any time. It's important to consider the potential impact of any changes to the estate tax laws and to make sure that your life insurance policy is protected from creditors and estate taxes.
Furthermore, some states have their own estate tax exemptions, such as Maryland which has a 2-year contemplation of death period. It's important to be aware of the estate tax laws in your state and to take the necessary steps to protect your life insurance policy.
One way to protect your life insurance policy from creditors and estate taxes is to make sure it is held in an ILIT or Asset Protection Trust. Additionally, it's important to make sure that your life insurance policy is going to payout when it's needed. Late or missed payments could cause a policy to lapse and become terminated. By setting up automatic payments, you can help to ensure they are always made on-time even if you are unable to attend to your affairs in a timely manner due to illness or disability.
In conclusion, protecting your life insurance policy from creditors is an important aspect of estate planning. By holding your policy in an ILIT or Asset Protection Trust, you can ensure that the cash value is protected and by making sure your policy is going to payout when it's needed you can ensure that it's protected from creditors, estate taxes and Medicaid. It's important to consider the potential impact of any changes to the estate tax laws and to take the necessary steps to protect your life insurance policy.
