Putting together an estate is important for many reasons. One of the main reasons for people who already have grown children to make a will is to make sure that their assets are split up and given to all of their heirs in equal amounts. Getting a life insurance policy can help you in many ways when you're making plans for your estate.
First Things to Know
One of the biggest myths about buying life insurance is that it's best to name your estate as the beneficiary of your policy. This isn't smart. If your estate is listed as the beneficiary, the money from your life insurance policy will have to go through the probate process first. Probate can be a long process that can take months or even years to complete. Probate is a process that courts use to make sure that a will left by a person who has died is valid. Your heirs won't be able to get any of the money from your life insurance policy while your estate is in probate. This could be a problem, especially if your family planned to use some of those funds to pay for your funeral and other bills right away.
Also, if the money from your life insurance policy is added to your estate, it will only make your estate more valuable. This could lead to taxes on your estate. Check with your financial advisor to find out what the tax rules are for estates in your area. Some states say that estates with a value of more than $1.5 million must be taxed. Up to 48% of an estate's value is taxed, with California having one of the highest rates. Obviously, the best thing to do is to name specific people to get the money from your life insurance policy. Go to http://www.equote.com/li/life-insurance.html to learn more about life insurance.
How life insurance can help you with estate planning
Buying a life insurance policy can help with estate planning in a couple of ways. First, a life insurance policy can help reduce or even get rid of taxes on gifts and estates. For instance, if you have a big estate and a lot of properties, you might give your son a summer home in the Hamptons. The person who gets the gift must pay a gift or estate tax on it, even if it's a piece of art or jewellery that can't be turned into cash. If you buy a life insurance policy, you can use the money to pay off the taxes. That would make your gift to your son a true gift, since he would own it outright and not have to worry about having to pay an unexpected amount for the inheritance. The money could also be used to pay for the different costs of running an estate.
A second way life insurance is used in estate planning is to protect younger generations from having their inheritances, like homes, pulled back into the estate after they have been given to them through a Qualified Personal Residence Trust (QPRT). QPRTs are put together by someone from the older generation of a family. The older person gives a house to the younger generation. If the senior lives longer than the QPRT term, the home will eventually go to the younger generation without having to pay any more gift taxes. But if the grantor dies before the time period is up, the house could be put back into the estate. So, having a life insurance policy protects against this by letting the next generation buy the house outright if the grantor dies suddenly.
There are a lot of other ways that life insurance can be used to help with estate and gift taxes. You should talk to a professional to help you figure out which planning methods will work best for you.
