Ways Life Insurance Can Lower Estate Taxes

Unlimited investment without paying taxes sounds like a dream. Most methods of leaving behind money will require your heirs to pay estate taxes. Even if you have less to spread around, many states will require that the estate pay taxes on non-spousal transference. Life insurance is one of the ways to get around estate taxes.DollarPic

Get Permanent Life Insurance

While many people have whole and term life insurance, a permanent life insurance plan is necessary. Permanent life insurance allows you to invest a cash amount that is untaxed. This cash can also be passed down to your kids and remain untaxed as well.

Place the Life Insurance in a Trust

In order for the life insurance to remain unburdened by estate and income taxes, it must be placed in a trust. The trust guarantees that the money can go to your heirs. If you die with a life insurance policy with you as the owner, your children will likely have to pay taxes on the policy that they collect. Instead, if you make a cash gift to the trust, this can be split among the trusts heirs.

Untaxable as You Build

One of the issues with collecting assets to leave to your family is the potential tax liability. On most assets you will have to pay federal and state taxes. Permanent life insurance policies are tax deferred. You can contribute to these for the rest of your life without tax issues. You can also contribute as much as you would like, unlike most retirement accounts in the United States.

Image credit: 401kcalculator.org

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