Want to offset the inheritance tax offered by Biden? Talk to your insurance broker

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Want to offset the inheritance tax offered by Biden? Talk to your insurance broker

What do they say about the fact that crisis and opportunity are the same thing?

As it turns out, Americans frightened by the prospect of President Joe Biden’s proposed capital gains tax hike could turn fear of handing their life savings back to government into an innovative workaround.

Nor is the solution a complicated loophole hidden deep in the bowels of US tax laws. It is life insurance.

here’s how buy the right life insurance policy can help your family keep more of what they have available.

Why will inheritance taxes go up?

Coins and real estate

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Biden has big plans for his administration, especially two giant spending bills aimed at improving the country’s aging infrastructure and boosting jobs after the pandemic.

But with the proposed cost of those two bills exceeding $ 4 trillion, the president must find a way to pay them.

Biden has suggested a series of tax increases that are expected to generate more than $ 1 trillion in revenue: lower the top personal tax rate to 39.6%, raise the corporate tax rate by 21% to 28% and double the capital gains tax rate from 20%. % to 39.6% for people with annual income of $ 1 million or more.

Take into account the 3.8% net income tax. High incomes are required to pay capital gains and they might consider a total capital gains tax rate of 43.4%. A related Biden strategy is to tax capital gains on inherited property on death.

Rather than allowing heirs to defer taxes on inherited property until they sell it, this particular proposal would see the transfer of assets from the deceased to the heir treated as a sale.

So, if it turns out that the value of an inherited property has increased by more than $ 1 million between the time it was originally purchased and the time it was inherited, the heirs could be immediately affected by the new capital gains levy – without postponement.

Say you pass a strip of valuable farmland up to your daughter. Since you bought it 20 years ago, its value has increased by $ 2 million.

This increase could result in up to $ 434,000 in immediate capital gains taxes, even after factoring in the million dollars and not including state and local taxes.

How life insurance can fight capital gains tax

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These capital gains increases are not set in stone. Any bill that includes them will meet stiff resistance in the House and Senate.

But if the increases survive the spanking machine of Congress, you can get around them by purchasing the right life insurance policy.

For large employees

If you were to transfer more than $ 11.7 million to your family, you could turn to an Irrevocable Life Insurance Trust (ILIT), which controls your life insurance policy while you are alive and distributes your assets a once you have reached the great abyss.

When an ILIT owns and controls your life insurance policy, the proceeds of your death benefit are not considered to be part of your gross estate and will not be taxable at either the federal or state level.

ILITs can also provide the kind of money needed to pay for property taxes and other expenses. They are more complex than your average insurance policy, so be sure to get advice from a trusted insurance provider.

For everyone else

If your family faces a potentially colossal capital tax after you leave, purchasing a life insurance policy that is large enough could help ensure that your savings don’t evaporate after you leave.

The first thing you’ll want to do is have your assets valued to see how much they’ve appreciated over the years. This will give you an idea of ​​the size of your capital gains bill.

Once you have an amount of money to work with, you can consider purchasing a life insurance policy that pays an amount equal to or greater than your capital gains costs.

You can opt for temporary or permanent policies. Permanent policies, which cover you until death, tend to be more expensive.

Temporary policies are often less expensive, and because they cover a shorter period, may be a better hedge against the failure of Biden’s plans.

Other Ways to Support Your Family

If purchasing heavy life insurance is not an option, there are other ways to help your family cover the costs of your death.

If you’re a homeowner and haven’t refinanced your mortgage in the past year, you could be leaving a mountain of money on the table. With rates below 3%, mortgage data and technology provider Black Knight discovered that 14.1 million homeowners could save an average of $ 287 per month with a refi. It’s money that you can funnel directly into savings vehicles and investments for your family.

Choosing which assets are most likely to pay off in the long run can be overwhelming if you’re not a market dog or a finance nerd. It may be tempting to get your social media investment advice, but you should always take the time to get your investment and retirement planning advice from professionals who know what they are doing.

Some investments, however, are simple and low-risk enough that anyone can do it. For example, running the booming stock market can be as easy as downloading an app that lets you invest in a diversified portfolio using “spare currency” of your daily purchases.

Remember to set aside some of your winnings – maybe a big one – for Uncle Sam.


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