You may not think of life insurance and estate taxes together, but having the right life insurance policy can be the difference in helping your heirs enjoy their inheritance.
Right now, the federal estate tax exemption is set at $5 million. If you give away more than this amount, your estate will be taxed at 35 percent. So if you give away exactly $5 million, your heirs will be faced with a $1.75 million tax bill right off the bat.
And unless your assets are tied in stocks or some other liquid asset, your heirs may be forced to sell whatever you leave. For example, most people may have the bulk of their assets tied to real estate. So if you leave a million-dollar family home to your heir, and your heir can't pay the tax bill, the heir may be forced to sell your house.
Purchasing a life insurance policy and designating your heirs as beneficiaries can help you provide cash to your heirs to pay off the tax bill, reports Insurance.com. Your heirs will simply use the cash proceeds from the policy to pay the tax bill.
Even if you don't think your assets will reach above $5 million, you should be aware that the estate tax exemption will be reduced to $1 million at the end of 2012, reports Insurance.com. So your heirs will be subject to a sizable estate tax even for more moderate-sized estates. Additionally, many states have their own estate taxes with lower exemption amounts. For example, New Jersey taxes estates valued at more than $675,000.
You should talk to an estate planning attorney about life insurance and estate taxes. This can be the difference in keeping the family home in the family.