Estate taxes make it difficult for wealthy people to pass their money down to future generations, and recent exemptions which increased the amount of money that can be passed on before taxes take effect may not last. Advisors have a responsibility to help these individuals preserve their wealth and legacy after they die, and life insurance can offer a respite from the monetary loss incurred from estate taxes.
Estate taxes in the news again
Currently, Republican members of Congress are working to repeal the estate tax altogether. This effort passed the House of Representatives with 240 votes, according to Forbes, but it has been widely reported that there aren’t enough votes in the Senate to pass the measure and even if they do, President Barack Obama is unlikely to let the bill pass his desk without a veto. It’s clear the current estate tax laws will remain in effect for some time, and it’s possible that members of Congress will push for an increase in the number of people affected by these rules.
Before we delve into how life insurance policies can help high-net worth individuals avoid estate taxes, it’s important to understand the current tax law and how these taxes impact wealthy individuals who want to transfer their money on death.
Under today’s laws, an individual can grant $5.43 million of their estate to other parties tax-free. That number is doubled for people who are married, so a couple can give away $10.86 million before Uncle Sam steps in to take a cut of the gift. If an individual or couple exceeds the limits placed on tax-free giving, the ramifications can be serious. The top gift and estate tax rate for 2015 was 40 percent.
How life insurance enters the equation
Life insurance offers multiple benefits for wealthy people who want to maximize their savings in life and can help individuals avoid the burden of estate taxes. The recent news about estate taxes represents a great opportunity for advisors to reengage their high net worth clients in a discussion of estate planning, and offers the chance to speak openly with people whose assets may be subject to estate taxes.
For people who have large assets that will be taxed on death, life insurance held by an irrevocable trust can offer an way to skirt estate tax laws. The money paid to the beneficiary of a life insurance policy is income-tax free, but may still be subject to estate taxes. Whereas, if the insured individual creates an irrevocable trust that owns the insurance policy and is the policy’s beneficiary, they are legally viewed as separate from an individual’s estate. This trust can then pay out death benefit proceeds to a person’s heirs without incurring the egregiously high estate taxes that diminish inheritances.
Low interest rates make life insurance a good choice
Even clients who do not have large estates can benefit from a life insurance policy. U.S. interest rates are currently at historic lows, and this makes it very difficult to see substantial gains from interest on money kept in bank accounts. While the Federal Reserve has indicated a rate hike is likely later this year, the raised rate will probably not exceed the interest rates available to people who hold indexed universal life policies.
Advisors can speak with their clients about the possibility of moving savings into indexed universal life policies that offer the potential for higher returns and the opportunity to build wealth that the policyholders can utilize later in life. Anyone who has substantial savings can benefit from making life insurance a part of their estate plan.
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- Robert W. Finnegan, J.D., CLU®, Published in Trusts & Estates Magazine - June 6, 2018
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