If you think you donít need life insurance, a significant amount of cash or some other type of liquid asset in your estate to pay estate taxes and other debts when you die, consider this. If you donít have adequate life insurance or cash assets in your estate to pay estate taxes or other debts owed at the time of your death, the plans you made for your family or other beneficiaries could be ruined. If you plan to leave property, a family business or investments to your children or other heirs and the value of your estate is above the estate tax exemption amount, your children or other heirs may be forced to mortgage or sell the real estate to pay taxes. They might also have to sell the family business or investments to pay taxes, rather than keeping them in the family.
While you may have assets in your estate that can eventually be sold to pay your debts and estate taxes, it can take time to sell real estate, vehicles, personal property, stocks, bonds, and other assets in your estate. The debts you owe at the time of your death become due and payable in full. Also, if any portion of your estate goes through probate, your executor will need to pay probate fees as well as attorneysí fees if an attorney is used. Federal estate taxes are due within nine months after death. Therefore, if there are certain items of property you want to pass directly to your heirs, rather than being sold to pay your debts or estate taxes, you should consider whether you need to add more liquidity to your estate. See need for liquidity.In addition to providing for your familyís financial security after youíre gone, life insurance can be a good way to pay estate taxes and otherwise add liquidity to your estate. However, itís important to have professional help when purchasing life insurance as part of your estate plan. Unless you take special steps when setting up the ownership and beneficiaries of the policy, the life insurance proceeds will be included in your gross estate and actually increase the amount of estate taxes owed.
Naming Beneficiaries on Life Insurance
When planning your estate, it is important to get advice from a professional before naming beneficiaries on your life insurance policies. What may seem like an obvious choice of beneficiary to you may actually result in an undesirable outcome for your spouse, children or other beneficiaries. For example, if you name your estate as beneficiary of your policy, the proceeds will have to go through probate. This will result in the proceeds being included in your gross estate, which could increase your estate taxes and reduce the amount received by your heirs. Also, by naming your estate as beneficiary, your creditors can go after the life insurance proceeds for any claims they have against your estate in probate. See
Creditor Claims Against Decedent's Estate.Also, when naming beneficiaries of your life insurance policy, be sure to name a contingent beneficiary, not just a primary. The contingent beneficiary receives the proceeds of life insurance if for any reason your primary beneficiary is unable or not permitted to receive the money. If you fail to name a contingent beneficiary and the proceeds are not paid to your primary beneficiary, the proceeds will be paid to your estate, which can have undesirable consequences as mentioned above.
How to Choose the Best Life Insurance Policy
There are many different types of life insurance. Most policies offer a variety of features, which can complicate your decision. If you are considering purchasing life insurance, do your own research before speaking to an insurance agent. Also, talk with several insurance agents for competitive quotes and policy options before choosing a policy.To learn more about how to choose a life insurance policy and which one may be the best in light of your estate plan, see types of life insurance.
Before You Purchase Life Insurance
Before purchasing life insurance or making changes to an existing policy, it is best to examine all your options and understand the pros and cons of the various types of policies. You can make a great investment with life insurance, but you can also end up paying a fortune for a policy that does not meet your needs. If you do not understand the differences between the types of policies available, educate yourself before sitting down with an aggressive sales agent.
Estate Taxes and Life Insurance
If you want to purchase life insurance, but are concerned about your estate tax liability, an estate planning attorney and your tax professional can advise you whether an irrevocable life insurance trust would benefit your estate plan. With an irrevocable life insurance trust, you do not own the life insurance policy. In order to keep life insurance out of your estate for estate tax purposes, you need to remove all incidents of ownership in the policy, such as the right to change the owner and beneficiary. If you will be transferring ownership of an existing policy to the trust, it is also important to consult a financial planner or tax advisor first, because there can be income tax ramifications to transferring ownership rights.
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