Avoid and Reduce Inheritance Taxes in Ohio
Editor’s Note: As of 2013, Ohio non longer has an inheritance tax. Residents may still be subject to Federal Estate Taxes, however. It is also possible that Ohio residents could pay inheritance taxes on property and assets inherited from a deceased resident of another state.
Furthermore, we still see many of our large-estate clients using life insurance policies to assist with succession and business planning. The information below applied estates settled before 2013.
Countable And Uncountable Assets
If The Taxable Estate Is: The Ohio Inheritance Tax Will Be:
| Between $338,333 and $500,000 | $13,900 plus 6% of the excess over $338,333 |
| Over $500,000 | $23,600 plus 7% of the excess over $500,000 |
Most assets count toward the $338K minimum – assets such as real estate located in Ohio, vehicles, bank accounts, stocks and bonds, mutual funds, business interests, annuity accounts, and even the contents of your home.
Life Insurance Proceeds Are Not Taxable
The one asset class that is exempt when calculating an estate’s value is life insurance paid to a named beneficiary. However, if the life policy is paid to the estate for any reason, then it would be counted and therefore taxable. It is important to regularly review existing policies for beneficiary designations.
When paid to a named beneficiary, life insurance policies can and will avoid the Ohio state inheritance tax. With this in mind, a select few insurance companies have designed plans that can help reduce your countable estate.
Guaranteed Issue Life Insurance – 4% Growth
A common concern about life insurance is whether someone can qualify medically. If you are in good health, then purchasing a life contract is very easy at most ages.
The good news is that a guaranteed issue policy has recently been approved for those who are in poor health or who would prefer not to be medically underwritten. This life insurance policy requires no underwriting and can be issued up to age 99.
It is a single premium life contract with an increasing death benefit that requires no monthly payments. A $99,000 thousand dollar deposit purchases $100,000 in immediate death benefit. The death benefit is guaranteed to grow by 4% each year. After year one, the $100,000 death benefit would grow to $104,000 and would increase by 4% each year thereafter.
Advantages Over Traditional Investments
This new life insurance contract could be a very good fit for someone who is older or in below average health. It works somewhat like a fixed annuity in that it guarantees interest, except that the death benefit is not subject to income taxes and would not be counted toward the gross estate for Ohio inheritance tax purposes.
A properly designated life policy offers distinct advantages over a certificate of deposit, annuity account, mutual fund, or brokerage account in that it avoids both income and inheritance taxes for your heirs. And again, the death benefit increases by 4% each year which is superior to most other available fixed rate investments.
In summary, those who need to reduce their exposure to what has been deemed the “Ohio death tax” should consider a life insurance policy. You can purchase a single premium policy that is guaranteed to increase each year. Planning ahead will help you, your estate, and your heirs retain more of your accumulated wealth.
Contact us today to discuss your options.
Category: Life Insurance, Retirement Planning
Why Do I Need Life Insurance Anyway?
September is life insurance awareness month, thus we will do our part to discuss the overall benefits of these products. When compared to other financial instruments, life insurance policies have several unique and attractive attributes.
Policies will come in many shapes and sizes with several options for the insured, but it may be most important to simply touch upon the purpose of life insurance.
Life Insurance for Future Obligations
For most of us, there are future obligations both known and unknown. In many cases, term life insurance will be the best product to account for said obligations. Policies with large face amounts are usually quite affordable and can adequately cover future expenses for the insured. Additionally, life insurance proceeds are not subject to income taxes for policy beneficiaries and thus provide a known benefit.
Life Insurance For Mortgage Insurance Debt & Home Loans
Many young families have mortgage debt, student loans, and car debt among other liabilities. Term life insurance provides the needed liquidity to cover these obligations for a surviving spouse. The length of the policy, or term, most commonly is 20 to 30 years. By the time the term has expired, it is conceivable that much of this debt has been paid down and would be easier to manage.
Costs of Raising Children – Coverage For Your Family
Children are another concern for most families. The cost of a higher education is significant at many public and private universities alike. And the inherent costs of raising children is no small amount. Term life can also account for these outlays should they be needed. A twenty or thirty year term life policy will give parents a reasonable grace period of time to see their children grow into young adults.
Life Insurance For Income Replacement
Most people think of disability insurance when discussing income replacement. Life insurance can also serve this purpose for the primary financial provider in a household. Term, universal, and whole life policies will all serve the purpose of replacing lost income. Insurance proceeds give the surviving beneficiaries needed liquidity to cover everyday expenses in times of need.
In all, a well thought out life insurance plan will cover debt while also providing for future obligations such as education and lost income. Term policies protect against the unexpected, provide peace of mind, and literally buy time for young families.
Life Insurance Policies and Tax Advantages
Wealthier consumers use permanent plans or whole life insurance for estate and retirement planning. When structured properly, life insurance can avoid both federal estate and state inheritance taxes. Not all states have an inheritance tax, but those that do may not count life insurance proceeds that are directly paid to a named beneficiary as part of the estate. New Jersey and Pennsylvania are two such states.
Whole life plans also immediately increase the value of an estate to provide needed liquidity for the beneficiaries. The proceeds can be used to pay taxes and expenses in order to avoid a quick sale of valuable assets. In other cases, permanent life might be used to keep a business afloat or to buyout a partner. In other words, guaranteed whole life has several advanced uses for those who need to protect an estate or a business.
In summary, there is a strong need for consumers to be properly insured. Whether it is to protect wealth or to provide for their families, life insurance policies are an extremely important piece of any financial plan. Contact us today to see which life insurance policies might best fit your family or business needs.
Category: Life Insurance, Retirement Planning
Whole Life or Term Life Insurance? Which One Is Best?
Life insurance shoppers want to know: What is the difference between whole and term life insurance and what type of policy should I purchase? The answer is usually simple depending on the circumstances.
Listed below are life insurance explanations as well as recommendations for purchasing a life policy, tax avoidance and estate planning strategies.
Whole Life Insurance Policies
Whole life is designed to cover the insured for his or her entire lifetime. A portion of the premiums pays for the cost of the insurance and a portion is invested in a fixed interest account usually referred to as the cash value account.
Over time the cash value will increase with additional premium deposits and interest credited in the fixed account. Eventually, the policy will be “paid up” meaning enough premiums have been deposited and the cash value has grown to cover the cost of insurance. When this occurs, the death benefit can also increase above and beyond the amount of insurance applied for.
Whole life has the advantage of covering the insured for life while also providing cash value for future needs. Owners can either withdrawal or borrow against their cash value for future monetary obligations. It is worth noting that there are several riders and versions of whole life insurance that can change the overall performance of the policy.
Term Life Insurance Coverage
Term life insurance is the least expensive type available. The insured pays the premiums for a set term (say 30 years) and in essence rents the insurance for that time period. There is no cash value built up in the policy and all benefits will cease to exist when the term has expired.
Consumers purchase term life to cover their families financial obligations in the event of an untimely passing. The insured might take into account future mortgage payments, college tuition, debt, the cost of raising children, and several other factors when purchasing term life. Like all life policies, there are variations and riders available in the term marketplace.
What Should I Buy A Term or Whole Life Policy?
In most cases, it is advisable to purchase term insurance. It is affordable and will provide peace of mind for the insured and his or her beneficiaries. Term will provide the cushion needed to in the event of a passing. Once the time period has expired, then conceivably the insured would be in a comfortable financial position – the kids are grown and out of the house and the mortgage is paid off.
Whole life makes more sense as a tax free investment that can be used to transfer significant amounts of wealth between generations. Life insurance benefits are tax free to the beneficiary(s) and can, in some states, also avoid inheritance taxes – Pennsylvania and New Jersey are two such states. Additionally, irrevocable life insurance trusts can be used to reduce federal estate taxes and to pare down owned assets.
Granted, this is a very simple explanation of the two most common types of life products. It is always best to work with a knowledgeable life insurance agency in order to find a suitable policy for your needs. Please contact our agency to learn more.
Category: Articles, Life Insurance, Wealth Transfer
Wealth Transfer Using Life Insurance
There are several strategies you can use to pass assets to the next generation while mitigating taxes. This article will focus on life insurance for wealth transfer as it’s one of the most efficient. Life policies immediately create a fully valued tax-free asset upon first premium receipt.
Our clients ask about cost effective ways to maximize the distribution of assets to their spouses, future generations and favorite charities. There may be no better asset class than life insurance.
Why Use Life Insurance For Wealth Transfer?
There are many reasons, but the most common ones are cost and tax avoidance. With life insurance, you are paying pennies on the dollar. When you consider that a healthy 60 year old can create a $100,000 death benefit with a one-time deposit of around $25,000, the numbers make sense.
And of course, life insurance proceeds are income tax-free to beneficiaries. Additionally, these policies can be structured to avoid federal estate and state inheritance taxes. There are very few asset classes that can do this much. That’s why life insurance policies are used so often in estate planning.
What Types Of Life Policies Work Best?
The two most common types are whole and universal life insurance. You rarely see term life insurance used as these types of policies have a defined ending point. A policy that expires after a 10-30 year term will have no benefits if the insured is still living.
Whole and universal policies each have their own advantages. Whole life policies are more conservative and generally offer more cash value. Universal life policies may have little cash value, but can create much larger death benefits with smaller premium deposits. And both types can be guaranteed to cover the entire life of the insured.
Single Premium Life Insurance & Life Pay Plans
Single premium life insurance is an often used strategy for wealth creation and transfer. With this type of life insurance, a single premium is deposited creating an immediate death benefit. The death benefit is guaranteed until the owner passes away. Typically single premium policies provide larger death benefit amounts when compared to lifelong or multi-pay policies.
Multi-pay or lifelong policies are just what you would guess – policies that are funded over a set number of years or a lifetime. These types eliminate the need for large upfront sums of money and can have additional tax advantages to the insured. One size does not fit all.
Accelerated Death Benefits – Access For The Insured
Single premium life insurance can also benefit the insured during his or her lifetime. The cash value in a fully funded policy will grow quickly and can provide income to the if needed. In turn, the owner can also surrender the policy for its cash value. Other policies have an option of an accelerated death benefit that can be to pay for long term care expenses.
By using this rider, the owner can access their death benefit while living. It might be used to cover long term care expenses or other costly healthcare needs. Many policies include an accelerated death benefit at no charge to the owner. This allows consumers to transfer wealth while also accounting for future healthcare costs.
Simplified Underwriting – Easier Setup & Enrollment
Many elderly consumers feel that they are not healthy enough to purchase life insurance. This is not always true. Simplified underwriting allows many seniors to qualify for life insurance. With simplified underwriting, there is no physical or blood work needed.
So long as the proposed insured can answer no to a few health questions, medical underwriting can be done with the application and a quick telephone interview. The fact is single premium life insurance is not difficult to purchase. Those who feel they are in extraordinary health can choose to go through advanced underwriting and may qualify for increased insurance benefits.
The Tax Advantages Offered By Life Insurance Policies
Certainly the advantage of life insurance over an annuity, a savings bond, a certificate of deposit or other investment is its favorable tax treatment. The entire death benefit is passed income tax free to the beneficiary. However, the death benefit can count toward the gross value of an estate for estate tax purposes.
To avoid estate taxes, some policies are owned by the beneficiaries or an irrevocable life insurance trust. It is crucial to work with a knowledgeable agent and attorney if estate taxes are a concern.
Often single premium life is considered a modified endowment contract or MEC by the IRS. The policy can be taxable to the owner if gains are withdrawn- just like an annuity or savings bond can be taxable to the owner. If the owner is under the age of 59 ½ the IRS can access a 10% early withdrawal penalty. Thus these policies are best utilized when the funds are likely not needed in the immediate future.
Contact Us To Learn More
In conclusion, life insurance is a safe and dependable asset for many families. Life insurance is especially valuable due to the favorable tax treatment and guaranteed returns associated with these policies. It is important to choose a well-rated company and an informed advisor to select the best policy for your wealth transfer needs.
Category: Life Insurance, Wealth Transfer