In our last post, we began looking at the importance of proper estate planning, and specifically planning carefully so that the inheritance received by heirs isn't depleted by the need to pay off estate taxes.
Here we'll look at how life insurance can be a great way to ensure that estate taxes on your estate are fully covered, allowing heirs to receive property without having to worry about those expenses. Indeed, life insurance is probably a better option than securities and real estate for paying off estate taxes.
Because of the depressed state of the economy, it isn't necessarily accurate to assume that securities left to heirs are a good way to pay off your estate taxes. Even though stocks and bonds are relatively liquid compared to other assets, their value fluctuates quickly. And money tied up in real property is not easily accessible, and may not be able to be accessed within the time frame necessary to pay any taxes.
One great alternative is a whole life insurance policy. These provide a very liquid asset which is immediately accessible. Heirs would just use the cash proceeds from the policy to pay off any taxes.
One thing to be aware of is that any policy in your name would be included in your estate and subject to the estate tax. But there are ways to set up a life insurance policy for the purpose of paying estate taxes on your estate without subjecting it to the estate tax.
One good option is to issue the policy in the name of a trust. Any estate planning should, of course, be done with a qualified attorney.
Source: Fox Business, "How Life Insurance Can Save Heirs a Bundle," Margarette Burnette, Sep 27, 2011.