As I have mentioned before, I hate to hear, “Everybody needs Life insurance.” When I hear an insurance agent say that, the odds are that I am dealing with an insurance salesman rather than an insurance professional.
Not “everybody” needs Life insurance. However, the opposite is equally untrue. Life insurance is nice to have when you know why you have it.
This week I have published a series of posts explaining why some people need Life insurance.
That list includes
In today’s post I want to explore a different reason why people buy Life insurance.
You have heard, “The only things that are certain in this life are death and taxes.” Although that saying is generally said in jest, there is an element of truth. When you die, the government will show up to take part of your estate. The more you have been able to accumulate in life, the more the government will take.
The government will take part of your estate through two different processes. I will try to give you a basic understanding of them in this post. If you want more details, call an estate planning lawyer who knows the laws in your state.
When you die, the people who you owed money to when you were alive want to be paid. Your assets will be sold and your debtors paid off as much as possible. The courts will work with your executor to make certain that happens. If there is money left over after all your debts get paid, your heirs will inherit that.
That process is called Probate. If you have only been married once and your spouse survives you, the process is pretty simple. Your debts and assets will normally just pass over to him/her. The value of your estate will not be probated until after the second spouse dies
However, if you have been married before, have children that are not the result of your current marriage, or your spouse is already deceased things can get more complicated. Others may, or may not, have a claim against the assets of your estate. They must be paid before your children, business or charity get anything.
It has been said that, “Everything costs.” That is just as true for the courts when you die as it was for everything else while you were alive. The courts will not probate your estate without charging a fee. That fee will be subtracted from the value of your estate before your creditor or heirs receive anything. The lawyer that helps your executor through the legal process of probate will also be paid out of your estate.
Governments have been laying claim to estates since the days of Caesar. (The practice may go back even further but the Roman Empire is the farthest back my study of Estate Taxes goes.) In addition to probate fees, the federal government and some states have an Estate Tax. That tax is charged if the value of your estate is over a certain threshold.
The Estate Tax is designed to limit the amount of money that can be passed from one generation to the next. If you have accumulated a significant amount of wealth, you should consult with an estate planning attorney who knows the laws in your state.
Not every state has an estate tax. Those that do have an estate tax vary on the amount that you can leave to your children that is not taxed. If you have been fortunate enough to accumulate a large amount of assets during your life, you should see if your state does have an estate tax.
The state in which I live has no estate tax but the Federal Government does. The threshold for the Federal Estate Tax is $5,000,000. That means that when you die, you can leave your heirs up to $5,000,000 but anything above that amount you must give the government a percent of.
With the American Taxpayer’s Act of 2012, the percent of estates above $5,000,000 that the government takes was raised to 40%.
Most people who read this post do not have estates that are worth $5,000,000. Unless you live in a state that has an estate tax, this is an event that you do not have to plan for.
However, if you have sizable real estate holdings or ownership interests in Life insurance, don’t be too quick to dismiss the estate tax.
If you own real estate, have it periodically valued. If you own Life insurance, speak with your estate planning attorney or insurance professional to learn how you can get it removed from the value of your estate.
When you die, the government will find a way to take part of your estate. That kinda makes sense. Since you and your spouse are dead, you do not need to use your money, anyway. Why should your children inherit everything you have worked all your life for when the government can spend it just as easily? (Sarcasm intended)
Your attorney can use a type of trust to avoid the probate hassle for much of your property. However, they tend to be expensive and complex. Before you have one drawn up, have a heart-to-heart conversation with your attorney. You may find that it is just as economical to allow your estate to pass through probate.
If your estate would be subject to either state or federal estate taxes, your estate planner may advise a complicated “gifting” program to lessen the impact of estate taxes. However, the estate tax “look back” loopholes make “gifting” programs “chancey.” You may be just as well off leaving things the way they are and taking your chances with estate taxes.
There is a simple solution to the problem of the government having their greedy hands out when you die. It uses Life insurance.
There is a policy that is available called a, “Second-to-die” policy. It is also called, “Survivorship Life.” It only pays a benefit when the second insured dies. I mentioned it a couple of days ago in my post about Special Needs Children.
Probate fees and estate taxes are normally not required until the second spouse dies. If you have only been married once and want to replace the money that the courts or I.R.S. takes from your estate work with your estate planning attorney or accountant to determine how much money would be required to pay probate fees and estate taxes.
Once you have determined how much money would be needed, have your attorney draft an Irrevocable Life Insurance Trust (I.L.I.T.) and have that trust apply for, own and benefit from a Second-to-die Life insurance policy that will provide your estate with enough money to pay the courts and government.
That way your estate will not be artificially increased by the additional Life insurance. Your heirs will be able to have the full benefit of your life’s savings.
If you do not already have a relationship with an insurance professional whom you trust, I would like to apply for the job. Learn more about me by visiting the ABOUT page of this blog.