Why Life Insurance Is Key To Planning Your Estate


 So, you have just got your living trust set up. You feel good about it because you know when you pass away, the assets in that trust will pass directly to your heirs instead of going through probate. This is a win for team you! 

This is a great first step to planning your estate. After all, we do not want the gov't getting their grubby little hands on your assets and benefiting from your death...at least I do not want that for myself. Do remember though, you actually have to fund your trust with your assets. Your trust must own your assets that you wish to bypass probate and go directly to your beneficiaries. Otherwise it is just an empty trust that you wasted your hard earned money on

But contrary to what you might think, your estate planning not complete yet.....

When you die, the assets in your trust will pass directly to your heirs...this is true. But did you know that when the trust distributes those assets, your heirs will be on the hook for the income taxes? Meaning that the assets your heirs receive will be considered income to them. Though, there may be assets within the trust called returned principal that typically do not require taxes be paid. However, anything not considered returned principal will be taxed as income when distributed. 

Uncle Sam is a sneaky little devil.....

This means that when your assets pass to your heirs, they will likely be paying taxes on those assets. What is the issue with this? Well firstly, what if they cannot afford to pay these taxes? What if they can barely afford it, but it puts them in a bad way? What if it puts them in a higher tax bracket? Any one of these scenarios could potentially burden them. 

"Seriously!?! I just set up a trust to take away any potential burdens associated with my death."

So, is there a way offset this burden to your heirs? Absolutely!

The tool used to offset this burden is life insurance. When the life insurance company pays out your death benefit, it is completely tax free. This means that your beneficiary, or beneficiaries, will not have to pay taxes on the life insurance proceeds. This will ensure that they can afford to pay the income taxes on assets distributed to them from the trust because they will be receiving part or all of the death benefit.

You should make sure to speak with an Estate Planning and Tax Professional to know exactly what would be considered returned principal and the tax implications for your heirs. But I am giving you the general idea with this article.

I am not an estate planning professional or tax professional, but I work closely with those professionals to do what is best for my clients and make sure we are addressing each clients' specific needs and considering their unique situation in a comprehensive manner. 

Let me know if I can help you and yours. Find my Facebook page linked below.


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