Whole life insurance can avoid taxes by building cash value. Your cash value savings grow tax-deferred, so you don't owe income tax as long as you leave the money in your account. In comparison, if you saved through a savings account or a bank Certificate of Deposit, you'd owe tax on your interest each year.
Life insurance can build wealth in many ways, the primary one being the death benefit, which is passed along to your beneficiaries. This wealth transfer strategy is a way to immediately provide a cushion of wealth (depending on the death benefit amount) to surviving family members.
By properly structuring assets within an irrevocable trust, you can protect those assets from estate taxes. Life insurance in a trust can further protect assets from income taxes.
There are key ways to limit taxes upon your death by using life insurance death benefits. Estates can limit taxes (and in some cases avoid taxation) in one key way—transferring the ownership of life insurance policies—usually to an irrevocable life insurance trust (ILIT).
Asset Protection
In some jurisdictions, the cash value and death benefit of a whole life insurance policy are protected from creditors. This can be valuable for wealthy families, as it safeguards a portion of their assets from potential legal claims or financial risks.
Life insurance policies are usually left to the beneficiaries and are not considered part of the estate, unless there is no named beneficiary, or the first beneficiary passed away, in this case, the life insurance policy becomes the property of the estate.
Transfer assets into a trust
Certain types of trusts can help avoid estate taxes. An irrevocable trust transfers asset ownership from the original owner to the trust, with assets eventually distributed to the beneficiaries.
Indexed universal life (IUL) insurance offers several compelling advantages for estate planning: Large, Tax-Free Death Benefit: The money paid to your beneficiaries is generally tax-free, allowing for the efficient transfer of a greater portion of your wealth.
Reducing estate tax liability — If your estate is large enough, your heirs may need to pay estate taxes, reducing the amount they will inherit. However, life insurance proceeds can provide the liquidity to pay estate taxes and other estate expenses, thus helping to maximize the amount going to heirs2.
Ninety percent of all millionaires become so through owning real estate.
They can utilize leverage to borrow money from their policies for just about anything they need. They may pay, say 5% interest, to the insurance company with an Alternate Loan on their LASER Fund, while their money is still earning as much as 10% historically.
Cash value life insurance (also called whole life insurance) is a great form of life insurance for wealthy individuals.
The long-favored grantor-retained annuity trusts (GRATs) can confer big tax savings during recessions. These trusts pay a fixed annuity during the trust term, which is usually two years, and any appreciation of the assets' value is not subject to estate tax.
Millionaires don't worry about FDIC insurance. Their money is held in their name and not the name of the custodial private bank. Other millionaires have safe deposit boxes full of cash denominated in many different currencies.
Increased spending, decreased savings, and greater longevity are making it harder for individuals to leave a legacy for future generations. Permanent life insurance helps with generational wealth planning through three primary benefits: leverage, guarantees, and simplicity.
An IUL is a very bad option for retirement planning. As with any investment tied to an index fund, your returns will be mediocre at best. About the most you can expect the cash value to do is beat inflation over time—and even that's iffy.
Whole life insurance can protect your family
Whole life insurance offers death benefit protection that can keep your family financially secure in case you pass away. And because you are fully protected with your first payment, it can also be a good way to leverage your money.
While both offer tax- deferred growth, max-funded IULs provide greater flexibility in contributions and earlier access to accumulated cash value. However, this may involve potential tax implications and impact the death benefit. 401k contributions are limited, but withdrawals are generally tax-free after retirement.
Inheritance checks are generally not reported to the IRS unless they involve cash or cash equivalents exceeding $10,000. Banks and financial institutions are required to report such transactions using Form 8300. Most inheritances are paid by regular check, wire transfer, or other means that don't qualify for reporting.
The trust fund loophole refers to the “stepped-up basis rule” in U.S. tax law. The rule is a tax exemption that lets you use a trust to transfer appreciated assets to the trust's beneficiaries without paying the capital gains tax. Your “basis” in an asset is the price you paid for the asset.
More rich people are using 'secret' trusts and LLCs to hide money from their spouses. Secret trusts and LLCs are increasingly common ways wealthy people are shielding assets in divorce. Trusts and offshore accounts controlled by a shadowy company.
Strategies to transfer wealth without a heavy tax burden include creating an irrevocable trust, engaging in annual gifting, forming a family limited partnership, or forming a generation-skipping transfer trust.
One good way is to leave the inheritance in a trust. The trust can be set up with some provisions, such as making distributions over time.
Many advisors and attorneys recommend a $100K minimum net worth for a living trust. However, there are other factors to consider depending on your personal situation. What is your age, marital status, and earning potential?