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Planning for Estate Taxes

What comes to mind when you hear the term ‘Estate Planning’? The popular definition of the term is unfortunately restricted to merely the writing and execution of a person’s will. It is, however, a much broader concept that is closely related to, and an important component of, overall wealth planning. It is a long, well-thought-out process that doesn’t necessarily start with drafting a last will and testament. So then, when does it start? 

To answer this, we need to first know what estate planning entails. Estate planning can be broken down into three key phases: wealth accumulation, wealth conversion, and transfer of wealth upon death. Estate Planning essentially starts at the wealth accumulation phase. This is where you set aside a certain sum of money and certain provisions for your family to receive at the time of your death. A comprehensive life insurance policy is a great way to do this.  Life insurance can help the estate planning process in numerous ways:

  • Source of income for your family after the premature death of a primary wage earner. 
  • Accumulate tax-deferred wealth
  • Transfer wealth free of estate or gift taxes
  • Provide estate liquidity for estate settlement costs, allowing other estate property to pass to heirs

Using Life Insurance for Diversification

Wealth Creation: The cash value and or investments inside your policy accumulate on a tax deferred basis

Asset Protection:  Whether held personally or through a Life Insurance Trust, cash values and death benefits are an exempt asset and free from claims by creditors or judgements in Texas

Tax Management:  Policyholder may utilize tax free access to the policy's cash value through policy loans

Wealth Transfer:  The death benefit of the policy, in most cases, is paid to the beneficiaries free of income tax

Using Life Insurance in Estate Planning

Permanent Life insurance proceeds help your loved ones take care of legal and financial obligations after your death like funeral expenses, making payments to executors of the estate, estate taxes and paying off existing debt. These proceeds are generally tax free and are also a great way to save on estate and inheritance taxes. 

How the policy pay-out is to be handled can be mentioned in your will and testament. In the absence of notarized instructions, permanent life insurance proceeds are usually paid to/split among the beneficiaries of the policy who are then free to use it according to their discretion.  Many legal and functional challenges can be avoided by properly structuring an estate plan.

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