Life Insurance, Estate Planning and Taxes

Life Insurance, Estate Planning and Taxes

Life Insurance is a tax free benefit to the beneficiary and hence can provide liquidity to your estate and the tax free benefit could offset tax liabilities in the future.

When the first spouse passes away, there is a tax free roll over of assets to the surviving spouse. However, when the second spouse passes away, there is a roll over to the next generation and that could result in a tax liability. Therefore, assets like stocks, bonds, investment real estate is subject to a capital gain tax where the gain from the initial cost base is only taxed by 50%.

So the tax liability is faced by the heirs where they may need liquid cash to pay down the taxes. It is also seen that it could be difficult for the heirs to generate cash to pay the tax down in case their inheritance comprises of non-liquid assets. Generally, there are four options in terms of paying potential estate taxes:

1.  The assets are sold to pay off the taxes. This could be a time consuming obstacle in the case where assets are non-liquid.

2. The heirs can borrow money from a bank to offset the tax liability. This can also be a challenge.

3.  The parent or the owners of the estate start saving the tax liability in their lifetime to offset the tax liability. This could be difficult as saving is a factor of income and expenses.

4.  Purchase a Life Insurance which would pay out a tax free benefit to offset tax liability. A Joint Last to Die is appropriate for tax and estate planning. Here the payout is upon the death of the second spouse.  


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Life Insurance is a wealth maximising tool

A life insurance policy serves the purpose of replacing the income in case of an untimely death of the family breadwinner. In case of a family with two or three small kids, a mortgage and some additional debt, a life insurance policy on the parents would be extremely important. If one of the parents were to die, the surviving spouse would find it difficult to take care of the responsibilities and maintain a standard of living.


Joint Last-to-Die life insurance an important part of Estate Planning

A joint last to die life insurance could be one of the strongest tools to provide tax free money and hence could be part of Estate Planning. The tax free payout on the last spouse’s death could be to a named beneficiary or to the estate…


Prepared by:  Aman Kapur

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