Not only can estate taxes take out a big chunk from an inheritance, but they can also force the sale of an liquid asset (like a house) in order to pay them. With the use of whole life insurance, a monetary inheritance can be established without having to pay estate taxes.
It must be noted first, though, that the death benefit guaranteed under a whole life insurance policy can be taxed if it’s part of the policy owner’s estate, meaning that the person leaving the inheritance is the policy owner. The policy will be included as part of the policy owner’s property, and the value may push the estate’s worth over the federal estate tax limit.
Thus, in order to avoid estate taxes, a policy owner has to transfer ownership to another person, such as an adult child. Also, policy owners must not designate their estate or themselves as the beneficiaries. These changes must be made three years before the policy owner’s death in order to avoid estate inclusion and thus avoid estate taxes.
Whole life insurance policies can be complicated, and it’s best to always consult an insurance professional and a tax professional before making a decision about using whole life insurance as a strategy for dealing with estate taxes.