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Using life insuance to preserve your legacy

by Sanford Ellowitz

Life Insurance can be used by people who have substantial assets, allowing the legacy that they built over their lifetime to be passed to their heirs without being diminished by estate taxes.

Most people think of life insurance as only for younger people, who need to provide for their loved ones in case something happens to them before they have had time to accumulate sizeable savings. However, for individuals who have amassed substantial assets, the proceeds of a life insurance policy can be used to pay estate taxes, which can diminish a large part of their estate

The Estate Tax

As defined by the IRS the estate tax is a tax on your right to transfer property at your death. Besides the federal government, many states also impose their own taxes on their residents' estates. Your estate consists of the fair market value of either everything you own outright or your share of any property that you have an interest in at the time of your death. Fair market is the value of these assets as of the date of your death, not their cost when originally purchased.

You may be surprised to find that your estate might be larger than you thought, especially if you bought your home or made investments many years ago. This holds true as well for property, such as works of art or jewelry, which may have also highly appreciated in value since they were purchased.

Estate Taxes Can be Substantial

In 2009, the first $3,500,000 of an estate is exempt from federal taxes. Any amount over that is taxed at 45 percent. The federal tax is scheduled to be repealed in 2010, but when it is reinstated, only the first $1,000,000 will be exempt from taxes. Amounts above $1,000,000 are scheduled to be taxed at 55 percent.

Whether the exemption will stay at $1,000,000 after 2010 or be changed to some other amount is still up in the air. With a growing federal deficit, it is likely that some tax may remain, but the amount of the exemption may rise or the tax rate may be lowered.

Using Life Insurance to Pay Estate Taxes

If you find after reviewing your property and investments that substantial taxes will be due, consider purchasing life insurance. The proceeds, payable upon your death, can be used to pay your estate taxes, allowing your hard earned assets to pass intact to your heirs.

Preserving the Liquidity of an Estate

Life insurance can be also useful if most of your assets consist of property for which there may not be a ready market, such as a family business. Having to quickly sell a family owned business to pay taxes could be avoided if life insurance proceeds were used to pay the taxes.

Also, if you have a family owned business that not all your heirs wish to take part in, a life insurance policy can provide an inheritance for them. The other family members can then take over the business, without it having to be sold, with the proceeds having to be divided up among the family.

Life Insurance: Looking to the Future

You may want to consider other ways that life insurance can be part of your estate planning, such as paying for a grandchild's education or providing funds for a favorite charity.

As you take the time to review your financial estate, be sure to include life insurance. It is an important process of providing for your family well into the future.