Death is something that everyone faces but no one likes to talk about. It’s an unfortunate reality that not only causes a great deal of pain to those who lose someone, it can create financial chaos for those left behind. That’s why it’s so incredibly important to work out the details as soon as possible, and this is especially true for someone whose assets will exceed two million dollars at the time of their death. A life insurance policy should almost always play a role because no matter where someone fits within the financial spectrum, the benefits and peace of mind that a good policy provides are absolutely invaluable.
Since 2001, estate taxes continuously reduced to the point that there wasn’t a federal estate tax in the year 2010. Currently, the amount that’s excluded from estate taxes is around 5.1 million dollars per individual, and the tax rate on any excess is capped at 35 percent. In 2013, the amount that’s tax exempt is going to be reduced to 1.3 million, and the tax rate will start at 45 percent and it will cap at 55 percent. This makes estate planning more vital than ever since certain benefits and tax exemptions will only be available until the end of the year.
The Tax Implications of Life Insurance Policies
While the policyholder is still alive, certain life insurance policies can serve as a way of saving tax-deferred money for death or retirement, but survivors will still have to pay a hefty estate tax if it’s left in the policyholder’s name. This is especially problematic if the proceeds are made payable to the estate; it greatly increases the value of the estate and the tax burden increases as well. Those who are meant to receive the benefits may only get a fraction of what was intended.
This can be circumvented by transferring ownership of the policy to someone else. If it isn’t owned by the original policyholder, it isn’t included in their estate the beneficiaries get non-taxed proceeds. Money could also be placed within an irrevocable life insurance trust, but in both cases, the person that the policy applies to waives their legal right to make any changes to their policy. This also prevents them from withdrawing money in their retirement should they outlive their need for a life insurance policy, but these are the only sure ways to pass tax-free income onto their loved ones.
Tax Breaks That Won’t Come Again
2012 provides the best opportunity to plan a proper estate and ensure that those suffering in the wake of tragedy get the full benefits provided by the assets that are left over. There are aspects of the current laws that will likely change by the end of the year, making this a once-in-a-lifetime chance for people to provide their families with the most benefits possible. Tax-exempt insurance plans may not be the best choice for an individual, but it certainly is for their families.
Julia Gennings is a guest writer for life-insurance where you can find out more about Kanetix life policy.