Complex lives can lead to complex estate planning decisions for you and your family. It's simply not as easy as it used to be to pass on the family business or leave an inheritance to your children. Effective estate planning can help. It may enable you to reduce estate taxes, minimize or even eliminate probate fees and help you manage your assets more effectively.

Life insurance is one of the most effective estate planning tools at your disposal. It can help you address your business needs, charitable giving interests and special family concerns. Let's look at how life insurance is used and some key steps to take to maximize its benefits.Young families use life insurance to create an estate. If one or both spouses should die and leave minor children behind, a life insurance policy can help ensure their financial well-being. This is the most traditional use of life insurance. We purchase life insurance to protect our loved ones when we can no longer do it ourselves.

Another common use of life insurance is to provide ready cash to help pay estate taxes. This will help preserve family assets without having to sell them at fire-sale prices. This will give your heirs added peace of mind during a difficult period in their lives.

For a married couple, a second-to-die policy is frequently used. For most married couples anticipating an estate tax liability, the tax is due on the death of the second spouse to die. For that reason, the insurance policy is also paid on the death of the second spouse to die. Generally, insurance premiums are a lot lower on that type of policy.

Some people will gift existing life insurance policies to charity or purchase policies for the specific intent of gifting the policy to charity. In these instances, the donor may be able to receive a charitable deduction for the value of the policy and any continued premiums paid on the policy.

Business owners and partners can use life insurance to fund buy-sell arrangements. In a simple partnership of two partners, each owning one half of the business, insurance proceeds paid to the surviving partner provides him with cash to buy his or her deceased partner's share of the business from the decedent's estate, according to the price and terms set in the partners' buy-sell agreement.

Insurance is also used to compensate or even buy out the business interest of a partner who becomes disabled and unable to continue working in the business.

Now let's look at some of the mistakes people make when using life insurance and how to avoid them. Remember, even the best tools can backfire when they are not implemented properly.

First, make sure you are purchasing the right type of policy. Term policies and permanent policies have different advantages and uses.

Another consideration is whether you should have a single life or joint life policy. This may depend on whether the surviving spouse will need the death benefits or whether it's more important to have the benefits available at the death of the surviving spouse to help meet the costs of estate taxes.

Second, be careful in deciding who will be the owner of the policy. The proceeds of a life policy can be received free of both income and estate tax, but this doesn't happen automatically. Generally, the value of the policy is included in the value of the estate of the person owning the insurance. So, ownership of a life insurance policy could turn an otherwise non-taxable estate into a taxable estate. Without proper planning and ownership, your heirs may be faced with an unnecessary tax burden that was caused by how the insurance policy was owned.

Frequently, your insurance agent and your estate-planning attorney will work together, as a team, to coordinate your insurance purchases to make sure that you avoid any pitfalls that come without proper advice and planning.