Final answer:
Melissa and Jeff can choose between cash-value life insurance, which includes a death benefit and a cash value account, or establishing a trust to transfer assets privately. The estate tax applies to large inheritances and setting up an estate plan prevents state intestacy laws from dictating asset distribution.
Step-by-step explanation:
Melissa and Jeff are considering the most beneficial life insurance arrangement for their estate planning, to ensure their assets are transferred to their adult children with minimal tax liabilities. They have a couple of options to consider: cash-value (whole) life insurance and creating a trust. The cash-value life insurance has a death benefit as well as a cash value component, which acts like an account they can use during their lifetime. Upon death, the death benefit would be paid out to the beneficiaries, providing financial support and potentially helping to cover estate taxes.
On the other hand, setting up a trust could also be advantageous. It allows for the private transfer of assets, bypassing the probate court, and typically the assets and instructions within the trust become irrevocable upon death. It's worth noting that, according to LibreTexts™, the estate tax applies to a minority of individuals with significant wealth (those leaving inheritances of more than $5.25 million as of 2013).
If Melissa and Jeff die intestate (without a will or trust), state intestacy laws will dictate the distribution of their assets. Therefore, having a will, trust, or life insurance policy in place is crucial for passing on assets according to their wishes. Moreover, considering estate and gift taxes is important, as these are taxes on the transfer of assets to the next generation. The couple should consult with an estate planning professional to determine which option aligns best with their specific financial situation and estate planning goals.