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Pay Estate Taxes With Life Insurance

Consumers purchase life insurance to cover their funeral expenses, cover debt, and help their family payoff their mortgage when they are long gone. A majority of people who buy life insurance are making the purchase to pass on a legacy to their family. But if you are lucky enough to be part of the 1 percent of the population that is classified as wealthly or a high net worth individual, you might think that you have no need for life insurance. Just because you have a sizable nest egg and a large investment portfolio does not mean that you cannot use life insurance to your advantage.

As a wealthy American, or even a middle class American looking to provide your family with financial security, having life insurance can take the burden of paying your estate taxes off of the shoulders of the executor of your estate. Read on and find out why life insurance should be a must-have for people in every socioeconomic class.

You Can Never Predict How Much You Will Be Taxed

Estate taxes often become a much unexpected surprise to heirs who inherit large estates. In fact, a large percentage of heirs are not aware of the estate tax laws. Did you know that your heirs will be required to pay Federal taxes if the value of the assets distributed to the heir exceeds a specific threshold for the year? Even more surprising is the fact that the threshold that is set by the Federal government changes on an annual basis.

In 2012, heirs can receive up to $5.12 million when someone passes away without paying estate taxes. This threshold will drop down to $1 million in 2013 and there is only one year when inheritance thresholds are unlimited. Because you cannot predict when you will pass away, you should assume that your heirs will be taxed at a rate of 35 percent of the amount inherited. If the heir is not able to pay the taxes, they may be forced to sell off the assets to pay the taxes they never planned on paying. A tax free way to pay these estate taxes, is to purchase a life insurance policy for a face amount equivilent to 40 percent of your estate.

Liquidity is a Major Issue

Heirs are not given a very long period of time to pay the estate taxes that are due after you pass away. In fact, to avoid penalties and collection action, the IRS requires that you pay these taxes within 9 months. After this period of time, the IRS has the right to put a lien on property, claim property, or levy wages. Unfortunately, most heirs will inherit things of value that have no liquidity.

While real estate has worth, your heirs cannot simply pay the taxes with the real estate. The property must be sold and only then can the taxes be paid. When you invest in life insurance, you can provide your heirs with the liquidity they need to pay these taxes without selling off your property. This means that you can keep the property and family heirlooms in the family without forcing your loved one to figure out how estate taxes will be paid.

There are ways also to keep your life insurance proceeds out of the estate. This can be done by naming the beneficiary of the policy as the owner as well. This avoids from the tax free benefits from being part of the "insured's" estate. By naming the beneficiary as the owner of the policy they are able to receive the death benefit tax free. The beneficiary can then use those proceeds to pay the estate tax and any other final bills.

Estate Taxes Are Not Only Due to the Federal Government

Most states in the nation also charge heirs inheritance taxes. If you add together the amount your heirs are obligated to pay to the federal government and the state, you will see that a large portion of the money you worked so hard to pass down the family tree is going to be taken by the government and the state. But if you purchase life insurance and list your heirs as the beneficiaries to the policy, you do not have to worry about any of this. For a very small amount each month, you can protect your investment portfolio and all of your financial assets. It is very obvious why life insurance should be part of estate planning for all individuals.

In 2013, any heir receiving more than $1 million will have to pay estate taxes at a rate of 55 percent. This means that if you inherit $1.1 million in 2013, you will be taxes more than $550,000. Considering this, it is very important to purchase an adequate amount of life insurance based on the value of your assets. Sit down with a professional financial planner, purchase life insurance, and allow your heirs to pay your estate taxes for pennies on the dollar with life insurance payouts.