In the US, unlike in Israel, there is an inheritance tax on assets upon inheritance.
The estate tax levied on the inheritance amounts to approximately 40% (!), with an estate tax exemption threshold of only 60,000 $; for U.S. residents, the exemption threshold is 5 million $.
Estate tax applies to Anyone who invests in the US Even if he is an Israeli resident and does not live in the U.S. In other words, even someone who is not a U.S. resident but has invested in the U.S. during his or her lifetime will be subject to estate tax upon death at a rate of 40% on assets whose value exceeds the exemption threshold, as mentioned above, such as: bank accounts, real estate, stocks, bonds, mutual funds, etc.
For this reason, many investors are trying to find creative solutions to save on the inheritance tax imposed on their heirs upon their death.
One of the solutions currently offered on the market is a life insurance tool.
In fact, the investor insures through life insurance the amount of estate tax that his heirs will owe upon his death on all his assets, thereby granting his heirs the right to receive the tax refund that will be paid by them in the US by the insurance company with which he insured himself.
So, generally, the insurance sum an investor will insure will be for the amount of the expected estate tax, but not only that, as if they wish, they can insure an amount exceeding the estate tax amount and thus provide their heirs with additional tax-free funds. Because, as is known, receiving insurance money Exempt from all taxes.
Thus, upon the death of the investor who insured himself with life insurance, his heirs will be required to pay estate tax on their inheritance in the US, and at the same time will be entitled to receive the insurance proceeds tax-free, thereby in fact receiving back the taxes they paid in the US upon the passing of the deceased. Of course, if the investor insured himself with additional funds beyond the amount of the estate tax, they will also receive them tax-free.
The solution proposed in the article actually assures the testator that their heirs will not be harmed during the inheritance, thereby ensuring the integrity of the inheritance and the resulting financial certainty. Furthermore, life insurance allows an investor in the US to invest freely without fear of their assets being devalued in the future.
Of course, an investor who takes out life insurance will be required to pay a monthly or annual premium, and this must be taken into account, as it has financial implications; however, for investors with assets exceeding 60,000 $ (which, as mentioned, is the estate tax exemption threshold in the U.S.; for investments below this threshold, there is no point in taking out life insurance), it is worthwhile in any case, and it is best to do so as early as possible.
Reader question:
I am a resident of Israel and purchased an investment apartment in the U.S. worth 500,000 $. Will I be liable for estate tax upon my death?
Answer:
Absolutely. The estate tax that will apply to your heirs upon your death will be levied on the amount exceeding the exemption threshold of 60,000 $—that is, on a total of 440,000 $—at a rate of 40 %. Consequently, the estate tax levied in the U.S. on the apartment, before it is transferred to your heirs, will be 176,000$, and the same applies to any other property you own in the U.S.
