Today, the federal gift and estate tax exemption stands at $5.45 million ($10.90 million for married couples filing jointly). Because of this, fewer families are facing estate tax liability.

This begs the question: Can life insurance continue to play an important role in estate planning? The answer is: Yes. Because, even though a policy’s proceeds may no longer be necessary to provide liquidity to pay estate taxes, even nontaxable estates may have a need for its various other potential estate planning benefits.

Preserve wealth for future generations

If you die unexpectedly, life insurance can protect your family by replacing your lost income. It can also be used to replace wealth in a variety of contexts. For example, suppose you own highly appreciated real estate or other assets and wish to dispose of them without generating current capital gains tax liability. One option is to contribute the assets to a charitable remainder trust (CRT).

As a tax-exempt entity, the CRT can sell the assets and reinvest the proceeds without triggering capital gains tax. In addition, you and your spouse will enjoy an income stream and charitable income tax deductions. Typically, distributions you receive from the CRT are treated as a combination of ordinary taxable income, capital gains, tax-exempt income and tax-free return of principal.

After you and your spouse die, the remaining trust assets pass to charity, reducing the amount of wealth available to your children or other heirs. But you can use life insurance (a cost-effective second-to-die policy, for example) to replace that lost wealth.

You can also use life insurance to replace wealth that’s lost to long term care (LTC) expenses, such as nursing home costs, for you or your spouse. Although LTC insurance is available, it can be expensive, especially if you’re already beyond retirement age. For many people, a better option is to use personal savings and investments to fund their LTC needs and to purchase life insurance to replace the money that’s spent on such care. One advantage of this approach is that, if neither you nor your spouse needs LTC, your heirs will enjoy a windfall.

Fund philanthropic endeavors

If you’re philanthropically inclined, life insurance can help you support your favorite charities in a cost-effective manner. One strategy is to donate life insurance to charity. If you transfer a policy to a charitable organization, so that the organization becomes both owner and beneficiary, you’ll enjoy a charitable income tax deduction (subject to certain limitations), plus additional deductions if you continue to pay the premiums. Or, you can simply name a charity as beneficiary. You won’t be entitled to any charitable income tax deductions, but you’ll retain control over the policy, including the right to tap its cash value or change beneficiaries. When you die, your estate will be entitled to an estate tax charitable deduction.

Another strategy is to use other assets to fund charitable gifts and purchase life insurance to replace the wealth donated to charity. This strategy is particularly valuable if you have a significant amount in traditional IRAs or retirement plans. If you leave these assets to your heirs, they’ll be subject to income tax on any distributions they receive. But if you leave the assets to charity and purchase a life insurance policy for your heirs’ benefit, both the charity and your heirs will receive the funds tax-free. You can even withdraw funds from an IRA or retirement plan and use the after-tax proceeds to pay the premiums.

Maintain family peace

If much of your wealth is tied up in a family business, treating your children fairly can be a challenge. It makes sense to leave the business to those children who work in it, but what if your remaining assets are insufficient to provide an equal inheritance to children who don’t work in the business? For many families, the answer is to purchase a life insurance policy to make up the difference.

Protect assets from creditors

Depending on applicable state law, a life insurance policy’s cash surrender value and death benefit may be shielded from creditors’ claims. For additional protection, consider setting up an irrevocable life insurance trust (ILIT) to hold your policy.

Build the better plan

Life insurance can remain an important element of a well-designed estate plan. Even if your estate’s worth is firmly within the $5.45 million gift and estate tax exemption, owning a policy may benefit you and your heirs. Your estate planning advisor can help answer your questions regarding your estate plan and life insurance.