With tax hikes on the horizon, including increased taxes on inheritance, it’s no wonder taxpayers are looking for new financial vehicles that will help them, and their heirs, avoid hefty tax bills.
Could life insurance be one of those vehicles? Tax planning, and estate planning, experts say YES.
Why? New regulations are being proposed that would raise taxes on inheritance, among other things:
- Taxing capital gains rates on inherited property at death – treating the inheritance as a sale (excluding the first $1 million)
- Increased top capital gains tax rates to 39.6%, in addition to a 3.8% Net Investment Income Tax, with the total raised to 43.4%, PLUS any applicable state and local taxes. Wow!
- Taxes to be due upon death, and not upon sale of inherited property.
How can life insurance help?
- Life insurance policies can offer heirs tax-free proceeds upon death.
- These proceeds can be used to cover any final expenses (including funeral expenses and final taxes owed by the insured), debts, inheritance or capital gains taxes incurred by heirs, as well as estate taxes.
- More importantly, these proceeds can be accessed relatively quickly – much faster than it would take to liquidate real estate or other assets.
- Life insurance payouts (if a beneficiary or beneficiaries are named) are also not subject to probate – which can be a lengthy and public process.
In addition, cash accumulation within a policy can be accessed tax-free by the insured, via loans against the policy.