One of the biggest tax liabilities, which can take a massive toll on your personal assets, is estate tax. Those who don’t plan can have a large amount of money taken from what they intend to give to loves ones upon their death. To mitigate this, it’s important to focus on a strong estate planning strategy beforehand.
Taking steps to have a solid estate plan will help ensure your loved ones get the most of what you intend to pass down to them.
Estate Taxes 101
Upon one’s death, a person’s assets usually go through something called the “probate process”. This process analyzes what money will be collected/distributed from a person based on their will and/or other documents pertaining to their estate plan. There are usually administrative costs and fees that go along with this.
The estate taxes are levied in addition to the probate fees; these are separate processes despite being similar in nature.
What Life Insurance Accomplishes for You and Your Family
The goal of life insurance is to provide money to your family and loved ones once you pass away. In most cases, the beneficiary will directly receive the money and won’t need to pay tax penalties on the funds. If the policy is payable to an estate, it will be calculated into the gross estate and thus be subject to any relevant estate taxes.
The estate might also need to have these funds included if the policy entails what are called “incidents of ownership”. What this means is that you will have to appoint someone to make these policy payments in order to not have the benefit amount in the gross total income.
The process of policy transference is easy: one just needs to call the insurance company to assign the specific policy to another person. This 3rd party will also need to pay premiums on the policy as well. You can give a max $15K in gifts annually, so those who are assigned the policy can use this money to pay some of the premiums on the life insurance.
The Benefit of Trusts
It’s been said that a trust is a good tool for estate and tax planning, and that it can help to avoid estate tax penalties.
This is true to a point. However, you’ll also need to have the correct trust type for your particular situation. There isn’t one single estate planning trust that fits every situation. It won’t help you to have a trust if you don’t have the correct one for your particular needs. It could be harmful and even result in more tax penalties. Proper estate and trust planning will help mitigate this.
The Value of The Irrevocable Life Insurance Trust
Irrevocable life insurance trusts are one type of estate planning you can use. It utilizes your living trust in your strategy, and as its name suggests, it works in tandem with your life insurance. Its processed are the sole asset the trust contains; because of its irrevocable nature, it is unable to be amended, rescinded, or modified once it is set up.
When you put your life insurance proceeds in the trust, the benefits can avoid being taxed since they are part of your estate. Often this trust type is created solely to use the life insurance funds to contribute to estate taxes (though this isn’t always the case). This can be a great trust type for your personal estate and trust planning needs and strategy.
A big mistake people can make is the failure to effectively plan for end-of-life financial matters. Working with a financial advisor and legal professional will help mitigate your estate tax liabilities and will make sure your family receives the maximum amount of value that you intend with your estate.
Legacy and Tax Planning
Leaving your family with a significant amount of money is a goal many people aspire to. A permanent insurance policy can take care of this for you. If you don’t plan carefully, the estate and everything you leave behind for your family can be taxed away – your legacy would be left with the government. Fragasso Financial Advisors has a helpful article about legacy tax planning strategies that can help ensure your family is left with the legacy you intended. Estate planning is not exclusive to the wealthy, it’s for anyone who plans to leave any amount behind. A long retirement can eat up savings, leaving little to pass on as an inheritance. A life insurance policy can ensure that money is left behind for beneficiaries as a tax-free lump sum.
Investment advice offered by investment advisor representatives through Fragasso Financial Advisors, a registered investment advisor.