Tax law and estate planning are unquestionably complex, yet they often go hand-in-hand. When writing or litigating an estate plan, reducing tax liability is usually the key to maximizing payout as either a grantor or a beneficiary. Different investment options have a varying tax liability, so each grantor should understand how they can be applied to a family’s financial situation.
New life insurance policies may have the attention of the IRS
An investment option that appears to be working well for grantors and beneficiaries is raising some eyebrows in the Internal Revenue Service, according to Bloomberg. “Insurance dedicated funds (IDF)” are part of private life insurance policies. Investors contribute money as insurance dedicated funds, but because the funds are managed by the insurance company and not the investor, they are not taxed as capital gains funds.
Cash-value options in variable life insurance policies allow the insured to purchase additional investments and securities. According to Bloomberg, investors have an estimated $15 billion in IDF, which allow beneficiaries to obtain a higher tax-free payout after the death of the grantor. However, the IRS tends to act when the insured fail to take a hands-off approach to managing IDF.
What does IDF mean for the future of estate planning and tax law?
Although variable life insurance policies can be lucrative, they also carry significant risk. An estate planning attorney can discuss both the benefits and liabilities of including a particular kind of insurance policy in an estate plan. Insurers may display projections and promise significant returns, but they may only be considering the sale and not what’s really the best fit for the wishes of the insured.
For example, there are fundamental differences when considering non-taxable life insurance trusts that can separate the policy from the rest of the taxable estate. Failure to set aside a policy correctly could result in a larger tax burden when the estate is in probate.
Speaking with an attorney who has knowledge of both estate planning and tax law before purchasing life insurance can help grantors better understand the implications of each policy.