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Monday, June 19, 2006

Life Insurance & Estate Taxes

Life insurance is the most frequently used method for estate taxes planning in Taiwan. Even though life insurance carries higher expense, and the estimated rate of investment return, because of low interest rate, is lower in recent years. Though the beneficiary might pay income tax due to the latest minimum tax bill, life insurance still has some advantages.

First, life insurance can be used as the source of the estate taxes dues for the heir. The cash payout from the life insurance can be easily considered as the source for heirs to pay the estate taxes.

Second, the money paid as insurance premium is no longer considered part of the estate as long as the insurance policy has a beneficiary. The value of the insurance policy will be excluded from the estate, thus it will reduce the total value of the estate and the applied estate-tax rate.

Third, life insurance can be used as a specific transferring vehicle. Because life insurance with beneficiaries is exempted from the estate, it is also exempted from the entailment of Taiwan civil law. You use life insurance to transfer asset to specific heirs after your death.

Fourth, according to the condition of the life insurance, an ancestor/Policyholder can borrow against the policy as an unsolved debt in the estate. An unsolved debt can be used as a debit of the estate. Though borrowing from life insurance carries interest, it will not increase the total value of the estate no matter how much money is borrowed. The ability to borrow from life insurance provides needed liquidity while living.

About unsolved debt, Taiwan Tax bureau might ask heir taxpayers to explain the reason and usage. Bad estate plan with unexplained debt should be avoid, otherwise Tax bureau could reject the debt. The tax evasion could cost heirs double of the original tax.

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