Second-to-Die Life Insurance: Ideal for Estate Tax Planning and More

Federal estate tax generally applies when a person’s assets exceed a certain level, $11.4 million in 2019 and $11.58 million in 2020, at the time of death. The tax rate can be up to 40%. On top of that, some states also assess estate taxes.

That’s where survivorship life insurance – also called “second-to-die” life insurance – comes in. A second-to-die life insurance policy pays out an immediate cash benefit, tax-free, upon the death of the second spouse – not the first.

One common purpose for second-to-die life insurance is to provide a large amount of liquidity to pay estate taxes.

This can be important when a family’s wealth is tied up in illiquid assets that are difficult to sell. With a second-to-die life policy in place, the family or estate executors receive the tax-free cash death benefit right away, and can use that to pay estate taxes, rather than be forced to sell off assets like small businesses and real estate to raise the cash.

Otherwise, heirs may be forced to sell assets in the estate at heavily discounted prices, or at a very poor time in the market to sell, to meet the estate tax deadline.

Second-to-die policies also typically have lower premiums for a given death benefit than standard single-insured life insurance policies.


Use of trusts to move life insurance out of the taxable estate

Who owns the insurance policy itself? It may be prudent to set up an irrevocable trust, and have the trust own the life policy, rather than own it directly in your own name.

Otherwise, the life insurance policy would be considered part of the taxable estate, which would increase your tax bill. Setting up a properly constructed irrevocable trust will help you avoid this problem.

To set up the trust, speak with a qualified attorney and your tax advisor. Only a licensed attorney can write the documents required to set up the trust and ensure that it meets the requirements necessary for the assets in the trust to be considered separate from the taxable estate of the deceased.

Once the trust is established, the trust can then become the owner of the life insurance policy.

But, the applications of the second-to-die life insurance policy don’t stop there. Even if you don’t expect your estate to be big enough to be subject to federal estate tax, there are a number of other uses for this type of life insurance:

  • Funding for buy-sell agreements, where married couples operate their interests in a company together.
  • To provide for equal distribution of an illiquid estate to children. For example, one child may be able to run an inherited family business or farm, while other children may not have the interest or aptitude. Life insurance allows one child to receive the business and the others to receive cash, rather than forcing them all to liquidate a viable family-owned business.
  • Funding for special-needs children, who will still require support even after the death of the second parent. The parents can set up a special-needs trust to support the child – now an adult in many cases. This provides for their support without compromising their ability to qualify for Medicaid, food stamps or other need-based assistance.
  • To provide funding for the education of grandchildren.


There are other specialized applications where second-to-die life insurance works extremely well as a planning tool. To see if this type of policy would benefit your family, call us.

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