Estate planning is a financial strategy that prepares an individual to pass on his or her wealth and possessions to loved ones or next of kin. Most people have assets they want to pass upon their death. An estate plan is not just for the rich or elderly.
A well-designed estate plan can help you:
- Minimize or eliminate estate taxes
- Provide for orderly family business succession
- Plan for incapacity
- Avoid probate and probate fees
- Promote a charitable cause
- Minimize family discord
- Arrange for the guardianship of your minor children
- Preserve wealth throughout generations
- Protect assets from creditors, divorces, and lawsuits
- Provide for loved ones with special needs while preserving eligibility for government sponsored programs
- Promote your values throughout generations
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Did you know life insurance has estate planning benefits? Let’s review a few aspects.
Estate Planning and Taxes
Upon death, some estates will need to pay federal, state, estate and/or inheritance taxes depending on the size of the estate and where you live.
Only a small percentage of Americans have to pay a federal estate tax because of the high exemption dollar amount. The federal government raised the estate tax exclusion to $11.2 million per person, but this provision expires December 31, 2025.
It is possible that an estate that is too small to generate federal estate taxes may nonetheless trigger state estate or inheritance taxes. A state estate tax is a separate tax imposed by some states on all property owed at death.
|Which States Have Estate Taxes?|
|State||Exclusion Amount||Top Tax Rate|
|District of Columbia||$11.2 million||16%|
|New York||$5.25 million||16%|
|Rhode Island||$1.538 million||16%|
A state inheritance tax is another additional tax imposed in some states. This tax is placed upon those inheriting assets and is based on the beneficiary’s relationship to you and the amount they are to receive. The state estate and inheritance tax exemption amounts are generally less than federal.
|Which States Have Inheritance Taxes?|
|State||Top Tax Rate|
Life insurance can be very tax efficient.
For example, if you own a home worth $500,000 this is part of your taxable estate. If you own a $500,000 life insurance policy on yourself, this is also included in your taxable estate; however, if you transfer ownership to someone else then you can exclude it from your estate. Or just have someone else own it from the start.
Spouses and adult children owning life insurance on their spouse/parent is a common way to avoid additional estate taxes. Correct ownership of life insurance is extremely important.
Most people have assets they want to pass upon their death. An estate plan is not just for the rich or elderly.
Estate Planning: Probate
Probate is the court-supervised process that is designed to sort out the transfer of a person’s property at death. The overall cost of probate will vary according to state law and will generally depend on how large the estate is. The more you own, the more you’ll owe.
Some probate fees include:
- Appraisal fees
- Accounting fees
- Legal fees
- Personal representative fees
Life insurance offers tax benefits as well as typically not being subject to probate administration.
Using Life Insurance to Pay for Estate Taxes and Other Costs
After a person dies, certain taxes and other costs must be paid in cash within a short period following the date of death. These taxes and costs will deplete the amount left for your heirs and may include such expenses as:
- Federal and state estate taxes
- Funeral expenses
- Expenses of the decedent’s last illness
- Debts of the decedent
- Executor’s fees
- Attorney’s fees
- Court costs
- Appraiser’s fees
- Costs of insuring estate property
In addition, if an estate is short of cash, the executor may be forced to sell estate assets at a loss in value, which results in a reduction in the wealth that can be transferred.
An estate strategy not only provides for the disposition of an individual’s assets, but also makes certain the executor will have the cash on hand to pay estate obligations, and to avoid the forced sale of estate assets at a loss in value.
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Using life insurance to meet cash needs and to avoid estate reduction provides several advantages because of the unique nature of life insurance:
- The death proceeds are available immediately when needed.
- The death proceeds are usually received free of federal income tax.
- The policy can be arranged so as to avoid probate costs.
- Liquidation of estate assets, perhaps at sacrifice prices, can be avoided.
- Borrowing the cash at interest is also avoided, including paying the federal estate tax in installments.
- The policy will return more in death proceeds than was paid in premiums, allowing estate costs to be funded at a discount.
- For individuals whose estates will be subject to federal estate tax, the life insurance can be arranged so as to avoid inclusion in the gross estate.
Estate Planning Things to Consider
When it comes to estate planning, here are a few things you should consider:
- Do you have current legal documents, including a will, medical and financial powers of attorney, advanced healthcare directives, and, if needed, a family trust or guardians for minor children? Have you written a letter of instruction, including your burial wishes?
- Do your beneficiary designations on your life insurance, annuities, employer-sponsored retirement plans, and IRAs reflect your wishes?
- Do you have children, parents, or other family members or dependents with special needs?
- Have you thought about your legacy including a charity, educational institution, or other nonprofit organization at your death?
- Have you taken any action to reduce the amount of estate taxes that may be due at death?
- If you will have an estate tax liability, have you arranged your life insurance so that the proceeds will be excluded from your estate to minimize federal and state estate taxes at death?
To ensure your wishes are carried out you need an estate plan. If you haven’t considered these questions before and haven’t taken steps to plan for bequeathing your assets you may need to work with an estate planning attorney. If you have any questions on life insurance, leave a question in the comment section below or contact us directly.
About the writer
Writer, Editor, and Co-Host of Quotacy’s Q&A Friday YouTube Series
Natasha writes and edits content and is co-host of Quotacy’s YouTube series. She is also working toward her Chartered Life Underwriter (CLU) designation. When not working or studying, you’ll find her throwing a tennis ball for her pitbull mix, Emmett, or curled up on her couch watching Netflix. If it’s football season, the Packers game will be on.