A life of hard work may result in great wealth. Some desire to leave a legacy for their children and subsequent generations. Unfortunately estate taxes can make this simple desire complicated. Life insurance simplifies the transfer of wealth. Life insurance can establish a lasting legacy in a tax-efficient and cost-effective manner.
Life insurance was designed to protect widows and orphans from poverty. Since life insurance provides this important social benefit, Congress granted it special treatment. Life insurance is a tax-preferenced product that provides tax-deferred accumulation and tax-free death benefits. Many of these features make life insurance an ideal tool for wealthy families struggling with their unique issues.
Life insurance is a financial product uniquely designed to address problems only wealthy families encounter. Estates over $5 million can be subject to an estate tax rate of 40%. This tax is payable within a year of death. In addition to this federal tax, some states may impose additional inheritance taxes. Life insurance held outside the taxable estate are well suited to offset estate tax losses.
Equally as important, life insurance can provide the needed liquidity to preserve assets prized by the family. Many wealthy families derive their wealth from closely-held businesses or other illiquid assets. When these businesses are transferred, special issues arise. Owners may be forced to liquidate interests to fund estate taxes or may distribute business interests unevenly since family members may have different interests or abilities. Life insurance can equalize transfers among family members and provide the needed liquidity to keep the business in tact.