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Life insurance can supply a comfort zone in estate plans

All the attention paid in recent days to the impending expiration of current federal estate tax exemptions may have some Seattle-area residents feeling stressed out about estate planning concerns. Fortunately, effective estate planning for most Americans need not be overly stressful or expensive. Something as simple and common as life insurance can go a long way toward easing concerns over estate taxes.

Many estate planning professionals regard life insurance as an essential element of most estate plans. Although most people think of life insurance as a source of cash for heirs separate and apart from probate assets, it can be particularly useful as a way to handle issues that arise in business succession and families with children from prior marriages.

For example, life insurance proceeds could be dedicated toward buying out children who are not interested in inheriting interests in a family business. Insurance proceeds could also be used to pay off a mortgage and ensure the comfort of a surviving spouse.

Life insurance policies can also be used to reduce the taxable assets in a person's estate. Because insurance proceeds are not subject to the inheritance tax, an investment in a policy of equivalent value can represent significant savings to heirs and beneficiaries.

At the very least, insurance proceeds can be applied toward the taxes due on a probate estate. Federal estate taxes come due nine months after a person's death regardless of whether or not assets are tied up in probate. Life insurance provides a quick source of liquid assets that can be applied to estate taxes in order to allow heirs any additional time they may need to sort through challenges that arise during estate administration.

While life insurance alone cannot substitute for a will and other important estate planning instruments, it continues to afford important benefits that make it worthy of inclusion in most Washington estate plans.

Source: Fox Business, "Life Insurance Muzzles Estate Tax Bite," Chris Kissell, Oct. 29, 2012

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