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Tax-efficient estate planning with life insurance
9/25/2018 6:58:46 PM
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INSURANCE
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By Susan Yates  | Thursday, May 10, 2018


 



Estate planning is a very serious business. The estate represents a lifetime of saving with, perhaps, associated scrimping and sacrifices along the way. It is a lifelong effort. The estate owner will, rightfully, want to ensure as much of this hard-won cash is transferred to beneficiaries as possible, without reduction by tax, probate, or other fees. Here’s a way to achieve that objective: life insurance.

Reducing or eliminating the tax hit is a primary reason to have life insurance later in life. At a younger age, life insurance plays a key role to replace income that may be lost due to premature death, sickness, or disability. However, once the need for income replacement has been eliminated – perhaps because income from employment is no longer being received – then it is time to assess estate plans and how life insurance can facilitate wealth transfer.

A life insurance policy can be issued as a personal policy or a joint policy. A personal policy covers the life of one person, while a joint policy covers two people, usually spouses. A joint policy can be issued in two forms: joint-first-to-die and joint-last-to-die. If two spouses wish to have insurance, it may be less expensive to acquire the insurance in a joint policy than two separate personal policies. However, it is wise to obtain quotes on both – as separate policies and as a joint policy.

When a policy is issued as joint-first-to-die for two spouses, and one spouse dies, the surviving spouse receives the death benefit of the policy. When the policy is issued as joint-last-to-die for two spouses, and one spouse dies, the other spouse receives nothing from the policy. Eventually, when the survivor dies, the death benefit of the policy is paid out. It can be paid to the estate if a beneficiary or beneficiaries are not named in the policy, or directly to beneficiaries if named.

When insurance proceeds are received by the estate, the proceeds become part of the total estate value on which probate fees are based. However, this can create or supplement the pool of funds needed to pay debts and taxes owed by the deceased. Any money remaining after clearing debt can then be paid to the beneficiaries named in the will.

When the insurance proceeds are paid to beneficiaries named in the policy, they receive the proceeds tax-free. Also, because the benefit is received by the beneficiary and does not become part of the estate of the deceased, it bypasses probate.

How the beneficiary uses those proceeds is entirely his or her choice. He or she could use them to eliminate capital gains tax on a property being inherited from the deceased. If ample money exists in the estate to pay the tax, the beneficiary just might hold onto their windfall in its entirety. Property, in this instance, is any capital property owned by the deceased on which capital gains could be charged, such as real estate, an investment portfolio of shares and bonds, jewellery or art.

Ultimately, why would a couple choose joint-first-to-die? The insurance would be appropriate if there was any doubt about what would happen to a surviving spouse after death of the other spouse. Is there is enough money to pay for good-quality care for a spouse in later life? If not or if this is uncertain, then having the insurance proceeds paid to the surviving spouse gives each spouse peace of mind during their lifetime together for the future. And funds that are not used during the lifetime of the surviving spouse, for care or any other purpose, will form part of his or her estate for distribution by will.

Joint-last-to-die is the choice to enable estate transfer by providing funds for tax purposes. Of course, not all the money might be required for tax. Once again, proceeds in excess of need can provide cash in the pocket to the beneficiary to spend or save as he or she wishes.

Talk to your financial planner or estate lawyer about how best to coordinate the benefits of life insurance for the most tax effective estate planning result.

Susan Yates, an expert in insurance products and planning, is founder and president of the Centre for Life Insurance and Financial Education (CLIFE), providing continuing education courses to insurance agents and financial planners. She is co-author of R.I.G.H.T. Answers: Answers to 260 of Your Retirement Questions.

Notes and Disclaimer

© 2018 by the Fund Library. All rights reserved. Reproduction in whole or in part by any means without prior written permission is prohibited.

The foregoing is for general information purposes only and is the opinion of the writer. It is not intended to provide specific personalized advice including, without limitation, investment, financial, insurance, legal, accounting, or tax advice.

 
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