Throughout time, the purposes of life insurance in the estate planning context have simultaneously remained constant, while also dramatically changing. These alterations have occurred because of state and federal regulations. And these changes impact how estate planning attorneys advise their clients. However, it can be difficult for Texans to know the ways that life insurance can protect them against tax liabilities, along with ensuring assets are left for loved ones. Below are common ways—both previously and currently—that life insurance can be used in a Houston estate plan to benefit both the estate plan drafter and their family.
Paying Estate Taxes
Life insurance can be used to protect individuals against estate taxes. Previously, life insurance was traditionally used in estate planning for this purpose. While Texas does not have any state estate taxes, there are still federal estate taxes to worry about. Currently, individuals with an estate valued over $11.7 million will have to pay a tax. In these instances, people are often advised to use part of their life insurance policy to pay this amount—otherwise, the person’s estate will be required to pay this tax, and it may be taken out of assets otherwise given to heirs.
And while the estate tax exemption limit is currently high, this number has changed dramatically based on the presidential administration. Thus, life insurance may be used to protect—or pay—estate taxes later on, depending on whether this limit changes.
Minimizing Retirement Account Taxes
For individuals with extremely large retirement accounts, life insurance policies can also assist in minimizing the taxes associated with these accounts. In these situations, a person can purchase a life insurance policy using retirement funds to pay the insurance premiums. This reduces the overall retirement account amount, but it also covers the life insurance premiums. Then, at the time of the person’s death, the taxes associated with the retirement account will be much lower, and they also will have a tax-free life insurance policy—with which the money can go to their heirs.
Ensuring Inheritance for Complex Family Situations
For blended families, life insurance policies can be used to ensure children of both spouses receive an inheritance. After a person passes away, it is recommended that their children, or those legally recognized as their children, receive that life insurance policy. Then when the spouse later passes away, their children can receive the benefits from that life insurance policy. This guarantees that all children receive funds to assist them in the future, not just the children of the last surviving spouse.
Because estate planning and life insurance can be extremely complicated, individuals beginning this process—or even those who are unsure how their estate plan utilizes their life insurance policy—should contact an experienced estate planning attorney as soon as possible.
Contact a Houston Estate Planning Attorney
If you or a loved one are unsure how to plan to utilize life insurance policies in the estate planning context, contact the attorneys at McCulloch & Miller, PLLC. Our lawyers make sure to stay up to date on changing estate planning regulations that impact Texans and their families—we will then advise our clients on any necessary changes to their Houston estate plan that must be made. In doing so, we hope to reduce your stress about the future while creating a plan that fits your family’s situation. To schedule a no-risk consultation, give us a call today at 713-333-8900.