Peace of Mind

Life Insurance against tax increase

President Joe Biden wants to raise taxes on inheritances to help fund his lofty infrastructure plans. The proposals call for taxing capital gains on an inherited property at death, treating the transfer like a sale. Heirs may exclude the first $1 million of gains ($2.5 million for married couples). This new tax hike is separate from estate taxes on transfers of more than $11.7 million, unchanged since former President Donald Trump’s 2017 tax overhaul. The administration is also calling to hike the top capital gains tax rate to 39.6%. The highest earners may pay as much as 43.4% on long-term capital gains, including the 3.8% tax for Obamacare.

In my opinion, those plans are flipping estate planning strategies upside down. Currently, heirs defer taxes on inherited property until they sell it. They also receive a so-called step-up in basis, adjusting the property’s purchase price to the value on the date of death. But if Biden’s plans go through, heirs may soon face hefty tax bills at death.

If your inherited property growth exceeds $1 million, you may owe as much as 43.4% long-term capital gains taxes, not including state or local levies. As Congress wrestles over Biden’s agenda, it is worth exploring ways to lessen the possible impact. If taxes rise, some folks may buy more life insurance to cover the bills for example. People with more than $11.7 million, the estate tax exemption for 2021, may buy a so-called irrevocable life insurance trust, using the policy to pay taxes at death. But those with fewer assets may have life insurance without a trust.

life insurance for estate planning

The biggest perk of using life insurance for estate planning maybe peace of mind. People often feel a sense of relief knowing their heirs will receive tax-free proceeds to cover necessary expenses — such as levies, funeral costs, administrative fees, or unpaid debt — when they are no longer around. I think insurance is going to continue to be a tool used by wealthy folks.

While it may be too soon for sweeping estate plan changes, those impacted may want to get property appraisals to gauge their taxable growth. After receiving estimates, you may have a better idea about your possible capital gains taxes, revealing how much life insurance you may need for those bills.

If income and estate taxes keep you awake at night, life insurance might be the answer. Permanent life insurance is one of the most powerful tax planning tools you can find. It offers several unique ways to address your estate tax and income tax liabilities while resolving those tax issues for pennies on the dollar. If you use this strategy, the next tax season could seem like just another pleasant spring day. If Biden’s plans happen, you may want to be ready to “pull the trigger” on your new estate plans. There certainly is the risk of spending money on appraisals and Biden’s proposals fizzling out. But in my book, it may be better than taking no action and getting a costly surprise later.