Use of Life Insurance to Pay Estate Taxes is on the Rise
The enclosed article written by Mark Maremont and Leslie Scism in the Wall Street Journal states that an increasing portion of large insurance policies sold to affluent individuals are used to help their families with the payment of estate taxes. I often recommend that my clients use life insurance as part of their plan for combating estate taxes. Life insurance should be combined with a gifting strategy that will reduce the ultimate estate tax liability.
Life insurance enjoys numerous tax benefits. First, the “inside” buildup of cash value in the policy is not subject to income taxes. Second, the receipt of death proceeds is not subject to income taxes. Finally, the proceeds can be exempt from estate taxes if the ownership is properly structured. The most common structure for protecting the proceeds from estate taxes is to have the policy acquired and owned by an irrevocable life insurance trust.
The article raises the concern that Congress might choose to curtail the tax benefits of life insurance as a way to raise revenue. As the purpose of life insurance shifts from providing a safety net for the insured’s family to providing money to pay estate taxes, the justification for providing the tax benefits seems less compelling. The insurance industry has clout in Washington. I am predicting that there will be no significant reduction in the tax benefits of life insurance within the next few years.
