Common Mistakes in Life Insurance Designations
February 19, 2019 by Retirement & Financial Planning Report
Life insurance may play a vital role in an estate plan because insurance proceeds can be counted on to provide liquidity when it’s needed. With proper planning, insurance money can pay expenses such as estate tax and keep other assets intact.
Suppose, for example, Bill Smith dies and leaves a large estate to his daughter Julia. Substantial estate tax is due. However, most of Bill’s assets are tied up in real estate and an IRA. Julia might not want to rush into a forced sale of the real estate. However, if she taps the inherited IRA to raise cash, she will have to pay income tax on the withdrawal and lose a valuable opportunity for extended tax deferral.
Anticipating such an outcome, Bill could buy insurance on his own life. The proceeds can be used to pay the estate tax bill. Then Julia can hold onto the real estate while taking only minimum required distributions from the inherited IRA. If the insurance policy is owned by Julia or by a trust, the proceeds probably will not be included in Bill’s estate and will not increase the estate tax obligation.
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