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What is Inheritance Tax Insurance?

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  • Written By: Staci A. Terry
  • Edited By: Allegra J. Lingo
  • Last Modified Date: 02 November 2016
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Inheritance tax insurance is an insurance policy that funds any inheritance tax due on an estate after a person passes away. This vehicle for managing potential inheritance tax is primarily available in the United Kingdom. Whenever a person owns property worth over a certain amount of money, many state or national government entities require that the person’s estate pay inheritance tax on the value of the property following the owner's death. Since inheritance tax rates can be quite high and tend to only apply to quite large estates, people often seek to minimize the inheritance tax that will be owed after death, or to avoid paying inheritance tax altogether. Inheritance tax insurance sets aside a certain amount prior to death so that there are funds available to pay the inheritance tax due following death, which avoids the practical problem of heirs being liable for inheritance tax before they receive their shares of the estate.

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An inheritance tax insurance policy is often a whole life policy, which means that a person pays monthly or annual premiums toward purchasing an insurance policy throughout his or her life. The value of the policy may vary, depending on how the invested funds perform, and the costs of premiums also may rise or fall over time, also due to the investment’s performance as well as other factors. Upon the person’s death, the policy provides a lump sum of money designed to pay any inheritance tax liability, thus saving the person’s heirs from paying out the inheritance tax from their shares of the estate.

A person who wishes to purchase inheritance tax insurance must calculate his or her needs carefully, in terms of the value necessary to pay any inheritance tax in full that will be due upon his or her death. The inheritance tax amount is dependent on the value of the estate at the time of the person’s date of death, so this calculation involves forecasting future earnings on investments. Although it is impossible to take every possible contingency into account in making this calculation, an estate planning professional can be useful in helping with the valuation process.

An experienced estate planner or estate attorney can also combine various estate planning techniques with inheritance tax insurance to protect heirs from the headache of paying inheritance tax. For instance, estate planning professionals often set up trusts to help clients avoid paying inheritance tax. The availability of inheritance tax insurance, as well as estate planning regulations, vary by jurisdiction.

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