Your surviving family members will be responsible for paying a death tax on any non-liquid assets you may have.
One of these is the federal estate tax, which has a graduated rate based on the size of a person’s estate. Because it must be paid within nine months of death, your family may be in trouble if your most valuable assets are non-liquid investments such as businesses or real estate, warns Edward E. Graves, editor of “McGill’s Life Insurance.”
The Tax Policy Center provides information about estate taxes, including their history and the number of people who pay them. It should also be noted that, in addition to federal estate taxes, 15 states and the District of Columbia currently impose state-regulated death taxes. Additionally, if you or another family member makes a death-triggered nonexempt gift, federal gift taxes may be added to your post-death expenses. The administration of an estate may also result in gift taxes.
In both cases, life insurance proceeds generate cash to pay these taxes and keep any assets from being taxed, thereby benefiting your family.
Here are some strategies you can use to avoid estate or “death” taxes, according to Wells Fargo Advisors:
- Establish an irrevocable life insurance trust for your current life insurance policy. In addition, irrevocable trusts in the form of trust funds can be established for your children after your death.
- Take advantage of the current $1 million gift tax exemption as well as the $3.5 million estate tax exemption.
- While you are alive, you can make tax-free gifts to your beneficiaries (up to $13,000) without exhausting your estate and gift tax exemptions.
- Spend down the value of your estate while you’re still alive by making gifts to loved ones or charitable organizations.