Depending on how their affairs have been set up, the Capital Gains Tax will take effect when the person dies or after their spouse dies. The tax-free law on life insurance gives everyone but especially the rich, an easy method of creating more wealth free of taxes.
Life insurance becomes a key estate planning tool. If you look at examples of extraordinarily rich people such as James Gandolfini, he will end up giving half of his 70 million dollar estate to taxes because of poor planning. In essence, it uses the death benefit to offset the tax bill because the estate tax will be due when you die. Nevertheless, life insurance pays out after you die, and this allows the insurance companies to pay the bill rather than the heirs.
However, some contracts will not build cash-value like the others. People have to exercise understanding of a policy when purchasing because some life insurance agents are more interested in a commission than giving the right product. People who have a net worth exceeding five million dollars risk half their estate if they do not plan it properly. Creating a trust and buying policies help to mitigate the tax consequences.
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