Life insurance is a key component to the estate planning process. Gone are the days when life insurance was primarily thought of as a means to pay for funeral expenses and burials.
Life insurance is a tool many use to leave necessary funds to your surviving family members, pay off large debts and set aside funds in order to meet your children’s educational needs and goals. Life insurance is also used to fill the gap caused by all the taxes and other costs incurred following your passing, as well as providing a means for low-cost charity donations.
Let’s break apart what was just outlined in the paragraph above so you can have a better understanding of how essential of a tool life insurance is to your estate planning, as well as some other considerations:
Life insurance is also used to fill the gap caused by all the taxes and other costs incurred following your passing.
There are a number of expenses following your passing beyond funeral expenses and burial (or cremation, depending on your last wishes). Some of these expenses include estate taxes, probate court attorneys, income tax (filed on your final income tax return), and your final debts (mortgage, creditors, etc.).
. . . as well as providing a means for low-cost charity donations.
A portion of your life insurance can be donated to charity based upon your final wishes, and those listed in your estate will benefit from the tax deduction. Outline these conditions when creating a will. These conditions can also be outlined when creating a trust. As you can see, creating wills and trusts are both essential during the estate planning process even when life insurance is involved in the scenario.
Your estate taxes will not increase due to life insurance if you plan ahead accordingly.
Confer with your estate planning attorney about how to develop an estate plan that will minimize estate taxes. There are estate valuation thresholds that must be met (i.e. the estate must be valued under a certain dollar amount) in order to avoid such matters, and your attorney will outline this for you. If your estate exceeds this dollar value, outline a plan with our attorney to help beneficiaries reduce the associated estate taxes. Otherwise, the requirement to pay such taxes is inventible. Confer with your estate planning lawyer, too, about how beneficiaries may be able to avoid inheritance taxes if at all possible.
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