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As part of the estate planning process, we urge our clients to consider the liquidity of their assets and how this will affect the transfer of wealth to their heirs. Checking accounts, savings accounts, and money market funds are the most common forms of liquid assets, but life insurance can also be used as a liquid asset for estate planning purposes.
Why Are Life Insurance Policies Considered Liquid Assets in an Estate Plan?
The death benefit of a life insurance policy is paid out in cash, which can be used to pay any outstanding debts, taxes, or other expenses that may arise after the insured's death. This can be especially helpful if the estate does not have a lot of other liquid assets available. For example, many wealthy Mexican investors have substantial real estate holdings and businesses that can't easily be converted to cash.
If you have coverage needs in excess of $25 to $30 million, premium financing is an attractive option that prevents you from liquidating assets to pay for upfront premiums by utilizing a third-party loan.
What Happens Without Appropriate Life Insurance Coverage?
If your estate plan doesn't include sufficient life insurance, your heirs will be put in a difficult position. They may need to consider selling assets, taking out a loan, or using a credit line. In their time of grief, they might be forced to make decisions that put a family-owned business or sentimental heirlooms at risk. Proactive planning lets you leave a legacy for your loved ones and ensures that your family will continue to enjoy the benefits of your hard work for generations to come.
What Do Mexicans Need to Know About Buying Life Insurance in the United States?
Many of our clients are Mexican citizens who choose to purchase life insurance through a U.S. insurer. The United States has a more favorable life insurance market than Mexico. There are many different life insurance companies in the U.S., which creates competition and drives down prices. In Mexico, there are fewer life insurance companies, which gives them more pricing power.
Although purchasing life insurance in the U.S. is a cost-effective option for high-net-worth Mexicans, it's important to consider the potential tax implications. Under U.S. tax law, life insurance policies issued by U.S. insurers to Mexican residents are exempt from income and inheritance taxes. However, Mexican tax law may subject beneficiaries of these policies to income tax if they live in Mexico. To avoid this, trusts can be used to characterize the death benefit as an inheritance. An inheritance is generally not subject to income tax in Mexico.
Trusts can be either revocable or irrevocable and can be formed in any state within the United States. MEG International Counsel can provide guidance as to which state is best depending on the legal, tax, and privacy benefits you desire. Request our complimentary whitepaper, How Should Mexico Residents Hold Life Insurance Policies in the United States?, to learn more about this issue. Attorney Antonio Gastélum also explores this issue in an article featured on WealthManagement.com.