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How do you insure your estate taxes?

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Compliant content provided by Adviceon® Media for educational purposes only.


Your heirs will inherit certain assets tax-free, but not all. Life insurance can cover estate liabilities which would otherwise leave your beneficiaries with debts rather than an inheritance.

“Are you kidding? I thought I would inherit.” Hopefully your children won’t need to utter these words upon your death. Cash bequests, the house, life insurance proceeds, and heirlooms generally pass to the heirs tax-free. However, capital assets are assumed to have been sold at fair market value immediately before death. Each of these deemed dispositions of capital assets such as a cottage occur even if the asset is willed directly to an heir. But the tax liability remains in the deceased’s final tax return and reduces the value of the estate.

Here is the downside. If there is insufficient cash to pay the taxes due, assets your heirs may expect to inherit must be sold. After the death of a second spouse this can include assets such as: an old homestead property, a family cottage, a residence, your farm, an art collection, furniture, or business shares.

Consider taking out life insurance to cover any estate liabilities that could reduce the value of bequests that you want to make to your loved ones. A death benefit is paid out tax-free. Life insurance proceeds can circumvent probate if they are payable directly to a named beneficiary. If the estate is the beneficiary, the life insurance coverage should be raised to cover any probate fees.

 


 

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