The Best Way to Transfer Wealth and Reduce Taxes

As we move through our working years, a plan for retirement and final expenses are key issues individuals assess when it comes time to leave the workforce.  There are considerations in how to save funds and transfer to loved ones while reducing liabilities such as taxes. The best way to transfer assets to a spouse, children, and favorite charities is through different tools.  A lawyer can draw up a will or a trust; however, these tools are used to transfer assets, protect the estate and inheritances; not to generate wealth.  Permanent life insurance is the best way to create wealth or transfer wealth on a tax-favorable basis.

A tool that can leave funds behind, transfer wealth on a tax-favorable basis is through a life insurance policy.  A term policy can not carry a cash value, and individuals may opt for one to pay final expenses, and income replacement because of the unexpected death of an income-earning spouse.  However, a universal, variable universal or whole life policies can provide the transfer of wealth.

There are other uses with a permanent life insurance policy, such as loans, savings, or providing an income stream if you need it now versus giving it later.  A policyholder can use the benefits of a life insurance policy while the policyholder is alive and leaves benefits for loved ones and charities. 

  • Can take a loan against the cash value in the policy.
  • Generate an income stream from the cash value once they pay it up.
  • Single pay policies give options in transferring wealth to charities and loved ones.
  • Some policies will deliver a death benefit and the cash value combined.
  • The recipient of the death benefit proceeds does not have to pay income taxes from the benefits. (must be reported to IRS however)
  • Life Insurance is not probated if there is a will.
  • Alternative to risky investments in the stock market.

Generate Income

What about after the working years have passed?  What if you want to supplement your retirement?  Maybe you want to retire early? Perhaps you just want to make sure that when you pass away, your wealth transfers to your loved ones without the worry of other aspects such as probating a will. 

If you own a permanent life insurance policy, then these types build cash value over time, minus the cost of insurance.  Each year your insurance company should send an illustration that shows your death benefit, the cash value, and what your annual premiums are.  If you want to retire early and take a distribution of the funds from your policy, the great news is, that it is an F.I.F.O. or (first in, first out)  meaning your principal comes out first, and interest comes out last so you won’t be taxed until you collect your money that came from interest.

Beneficiary Does Not Pay Taxes on the Funds

Life insurance does not exempt an estate from paying federal or state estate taxes and any wealth distribution.  They calculate any proceeds of an estate toward the total estate, and each year those figures are subject to tax laws.  However, a person can transfer cash and build wealth through life insurance, avoiding probate, and income taxes to the recipient.  As always, consult your certified public accountant if you have questions regarding estate taxes and laws.

Check Policy Provisions

If you are looking for a way to transfer a large sum of money upon your death, there are some policies out there that can pay out a death benefit and the cash value.  Be careful, not all policies do this, and it is essential to ask before you drop a large amount of money for a single pay life insurance policy.  If you opt for the cash value and the death benefit, the initial investment will be a little more than if you are funding the death benefit only.

C.D. Alternative

For those of you who do not want to expose your funds to risk in the stock market, or you have exhausted your contribution limits with IRAs or 401ks, then instead of putting money in the bank where it draws little to no interest, check into the interest rates the life insurance policies are paying. An excellent stable company will offer a reasonable rate of return on the cash inside the policy with a guaranteed interest rate when the optimal interest rate drops. 

Life Insurance Can Generate Wealth and Security

There are many tools for retirement and planning for final expenses.  As we move toward our golden years, it is essential to reallocate investments to reflect what stage in life you are in. In our younger working days, we have the time to recoup the losses from the cycles of the stock market.  As we age and seek ways to generate income in retirement, our resolve in high-risk investments quells, and many need to reevaluate where funds should be allocated.  Life insurance is a tool that can generate wealth, transfer wealth, and have a death benefit attached.  Talk to your accountant and estate attorney to find out what is best for you and your family.  Consult a financial representative and find out what life insurance policies are suitable for your unique situation.  A financial representative can assist you in positioning your assets based on your needs. 

Like this post? Reach out to the writer if you need help with writing your content. Misty is a member of the International Association of Professional Writers & Editors. Wife and mom of three boys —her life and work experiences is what she is passionate about sharing.


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