With proper planning, life insurance money can pay expenses like estate taxes. It will help keep other assets intact.
For example, Thomas passes away and leaves his rather large estate to his daughter, Isabella. Because of the size of the estate, there’s a hefty estate tax due. However, unfortunately, most of Thomas' assets are tied up in real estate and an IRA. Isabella may not be keen on a quick forced sale of the real estate to free up some cash for the taxes. If Isabella taps the inherited IRA to raise cash, she’ll have to pay income tax on the withdrawal and lose a valuable opportunity for extended tax deferral.
FedWeek’s recent article entitled “Using Life Insurance to Protect Your Estate” provides that in this scenario, Thomas could plan ahead with life insurance. Anticipating such a result, he could buy insurance on his own life. The proceeds of that policy could be used to pay the estate tax bill. Isabella can then keep the real estate, while taking only the Required Minimum Distributions (RMD) that are warranted by law from the inherited IRA. If the life insurance policy is owned by Isabella or by a trust, the proceeds most likely won’t be included in Thomas' estate, and the money won’t increase the estate tax liability she has.
However, some common life insurance mistakes can sabotage your Florida estate plan:
- Designating your estate as the beneficiary. This will place the policy proceeds in your estate, which exposes the funds to estate tax and your creditors. Your executor will also have more paperwork, if your estate is the beneficiary. Instead, name the appropriate people, trust or charities.
- Naming just a single beneficiary. Name at least two “backup” beneficiaries to decrease confusion, in the event the main beneficiary should die before you.
- Placing your policy in the “file and forget” drawer. Review your policies at least once every three years, make the appropriate changes and get a confirmation, in writing, from the insurance company.
- Inadequate life insurance. In the event of your untimely death, if you have a young child, in all likelihood it will take hundreds of thousands of dollars to pay all her expenses, such as college tuition. Failing to purchase adequate life insurance coverage may hurt your family. This also shouldn’t be a hardship with term insurance costs so low.
Contact Us if you would like the name of a reputable life insurance agent that can help you avoid these costly mistakes.
Reference: FedWeek (Feb. 6, 2020) “Using Life Insurance to Protect Your Estate”