Managing Director Wintrust Wealth Management
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Should Life Insurance Be Part of an Estate Plan?

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After the Senate approved a $1 trillion bipartisan infrastructure bill, it completed action on a fiscal year 2022 budget resolution that reconciles up to $3.5 trillion in spending and tax relief provisions—a move that opens the door to tax increases on wealthy individuals and corporations. While the details still must be formed into actual legislation, the Senate committees responsible for doing so have been instructed to complete the bill by September 15, 2021—and CPAs and estate planners with high-net-worth clients should be watching.

Sep 13th 2021
Managing Director Wintrust Wealth Management
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As tax exemptions are targeted, life insurance policies could offer high-net-worth individuals a different means for protecting their estates.

We’ve been warned about what’s to come for our clients—and maybe even ourselves. While on the campaign trail, now Pres. Joe Biden proposed reducing the estate tax exemption to $3.5 million from the current $11.7 million per individual (indexed for inflation) and raising the top tax rate to 45 percent from the current 40 percent.

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This could suggest an accelerated sunsetting of the $11.7 million estate tax exemption, which is currently slated to revert to the pre-2018 exemption of approximately $5.8 million after 2025 unless it’s renewed by Congress. Sen. Bernie Sanders is also targeting estates in his For the 99.5 Percent Act, which goes even further by reducing the estate tax exemption to $3.5 million (not indexed for inflation), reducing the gift tax exemption from $11.7 million to just $1 million, and raising the estate and gift tax rates as high as 65 percent.

So, where can wealthy individuals and families turn to minimize their estate taxes? Life insurance.

Escaping Estate Tax

The benefits of a life insurance policy go far beyond the tax-free death benefit payable to a named beneficiary or paying for the insured’s final expenses. In many cases, life insurance proceeds are used to pay estate taxes to avoid the forced sale of assets or may be used to fund the buyout of the decedent’s interest in a closely held business. We also often see the proceeds being used to fund a trust to provide for minor or special needs children.

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Replies (6)

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By carltoncrabbe
Sep 14th 2021 09:50

Planning for these proposed changes to estate taxes and the use of life insurance and trusts needs to be done very quickly. Great update Daniel on the impending changes. Thanks for writing this up from www.capitalforlife.com

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By Fastyam
Sep 14th 2021 12:14

My late father had a Life Insurance Policy and for the level of contributions he made across the term of the policy it was a positive outcome with the returns being well in excess of the payments with the impact of inflation taken into account. However, there are many that do not benefit in the same way as they often fail to keep up payments and the policy fails to pay out at the time of death. In the UK the proceeds are part of the inheritance tax allowance and should the proceeds of the life insurance take the estate over the tax threshold then tax is payable.

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Replying to Fastyam:
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By carltoncrabbe
Sep 15th 2021 15:58

Just a note on this, if a life insurance policy is structured correctly, which typically means in a trust, there should be no UK inheritance tax payable on the death benefit. Adding a structure like this is often free and is straightforward. A financial planner should do this as part of the planning and sale of the life policy.

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Replying to carltoncrabbe:
Seth2016
By Seth Fineberg
Sep 15th 2021 16:02

Fair point, but this article was not aimed at the UK audience, US and Canada to a degree. cheers.

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Replying to Seth Fineberg:
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By carltoncrabbe
Sep 15th 2021 17:04

Hi Seth, the article was not aimed at a UK audience but the previous comment stated this about the UK "In the UK the proceeds are part of the inheritance tax allowance and should the proceeds of the life insurance take the estate over the tax threshold then tax is payable." which is why I replied with some commentary on the UK. I hope it helped clarify his UK comment.

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Replying to carltoncrabbe:
Seth2016
By Seth Fineberg
Sep 15th 2021 17:11

Fair point. Thanks for chiming in, feedback is Always appreciated here

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