There is a sense of pride that comes with providing the type of financial support that maintains a sound lifestyle. There is even more honor for the provider who not only plans ahead to protect a legacy that they have worked hard to create, but makes sure loved ones can maintain their security after he or she passes, as well as minimizing taxes owed to the government - while maximizing assets to family members. Those who fully explore their options will find utilizing life insurance in estate planning may be a very necessary step in offsetting estate taxes and creating liquidity at death.
In January of 2013, the American Tax Relief Act (ATRA) instituted changes to the Estate and Gift Tax system for deaths occurring after December 31, 2012. At this time, an individual can receive a personal estate tax exemption of $5,250,000 with a maximum tax rate of 40 percent. In other words, should the value of an estate surpass the $5.25 million mark, a tax of up to 40% can be assessed on the exceeding amount. Because gift and estate tax are actually one in the same, taxable gifts made during the lifetime of an individual are deducted from the amount of his or her personal exemption.
In addition, ATRA stipulates that married couples can combine their personal exemptions for a total of $10,500,000. Should a deceased spouse leave a portion of his or her personal exemption unused, the surviving spouse is entitled to the remaining amount.
When it comes to estate planning, there are a number of variables that make sure no one situation is ever the same. However, failing to utilize life insurance in estate planning commonly leads to families having to sell off assets in order to resolve the sudden tax burden they face. It is also common for families to be left in a state of massive uncertainty as they struggle with a sudden tax burden and the possibility that they may have to liquidate real estate or sell the family business to pay estate taxes.
Putting a universal or whole life insurance policy in place creates the estate liquidity that loved ones need to ensure they can meet short-term costs such as funeral expenses, daily living expenditures, debts, and estate taxes owed on a state or federal level. Other proven strategies, such as buying a policy within an Irrevocable Life Insurance Trust, have helped many plan ahead for providing ready cash to family as well as leaving money to a favorite charity, estate and income tax free.
Even if a life insurance policy is purchased outside of an ILIT and is subject to estate taxes, the proceeds of the policy are not considered taxable income for beneficiaries. Compare this to an inherited IRA that is subject not only to estate taxes but leaves loved ones to pay income tax on distributed gains. If you intend to purchase a large Universal or Whole life policy, consider using an ILIT in your planning to avoid estate taxes on the proceeds of life insurance.
In all reality, very few will actually have to pay federal estate and gift taxes in the coming years. However, it is still necessary to get professional advice when it comes to estate planning. Even if an estate dodges being taxed on a federal level, there are still many states that have their own inheritance tax system to plan for.
While the wealthiest Americans may have more complex estate planning to do, everyone who has a spouse or children should at the very least have a simple will in place. A professional estate planner will have the knowledge, tools and expertise to create just the right strategy that ensures the most important people in life aren't left behind to struggle, and life insurance may play a role in creating liquidity as part of a sound estate plan.