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Life Insurance for Estate Planning

One of the main reasons to put together an estate for people who already have children is to ensure that all the assets are distributed proportionately among the heirs. Estate planning and a life insurance policy go together well in a number of ways.

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What You Need to Know

It is unwise to name your estate as the life insurance beneficiary. Should this be the case then the insurance policy must first go through probate which may take months or perhaps even years to conclude.

The reason for the probate is to ensure the will is in fact valid. Should the beneficiaries require the money for expenses such as the funeral or paying some debts, then the probate can prove to be problematic.

What’s more, should the life insurance policy proceeds be added to the estate, it will increase the value of the estate and by doing so could mean that the estate is then taxable.

Thus it is wise to discuss the tax laws in your state with a financial advisor. Some states impose a tax on an estate which is valued at $1.5 million or above. Therefore, it could be wiser to deal with the policy separately from the estate, and to name specific heirs.

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Planning Your Estate and Life Insurance

Buying life insurance can help when estate planning. Firstly, estate taxes can be reduced or entirely eliminated with a life insurance policy. Let’s presume that you have a sizable estate and you decide to gift a small part of that estate to a daughter or son.

Regardless the bequest is non-liquid such as property or jewelry for example or otherwise, the recipient will be required to pay an estate tax. However, with the help of a life insurance policy, the taxes can be entirely offset. The funds from the life insurance can also be utilized in order to cover other administrative estate costs.

Secondly, life insurance can be used in estate planning in order to protect against the possibility for various inheritances being pulled back into an estate. In the case where a junior member of a family has been the beneficiary of part of an estate, the estate is passed down via what is called a Qualified Personal Residence Trust (QPRT).

Should the senior family member who made the original bequest outlive the term of the QPRT, then the junior will receive the estate without the need for any additional gift tax.

Nevertheless, should the grantor pass away before the specified term of the QPRT, then the part of the estate which was gifted can be brought back into the estate and is subject to being taxed.

With the aid of a life insurance policy, the junior generation member is able to buy the gifted estate outright should the grantor pass away prior to the end of the QPRT term.

It is always wise to consult with a professional insurance agent in order to determine what’s best for your particular situation because there are indeed other ways in which to protect an estate from tax.


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