Probate and estate plans have a mystique of their own to the average observer. It is certainly a complex world of tax rules and regulations in which inherited assets are taxed at death. How might this affect you and the assets you now own?
First of all, what is a farm? Simply put, it’s the total of all your assets, including your home, car, pension and other retirement funds, collectibles, and possibly the value of a business minus the liabilities that make up your estate. Also included in the total estate is any life insurance owned by the owner of the estate.
When you buy life insurance, you own that asset and it becomes part of your estate. For example, if you had to save $250,000 over your lifetime and wanted to pass it on to your children, that would be to your advantage. By owning a $250,000 life insurance policy with your children as beneficiaries, you have created an instant asset; an instant property. Same result.
Estate taxes came into play in the late 19th century as a means of redistributing wealth. As a result, the estate tax system is now based on a tax on the recipients of the inheritance (children, for example) due and payable within 9 months of the death of the second spouse in a typical family situation. The tax rate ranges from 18% to 45%. Too big a tax bill for anyone to pay.
There is a long list of artists, actors, singers and businessmen who did not have an estate plan at the time of their death. Joe Robbie owned the soccer Miami Dolphins the year they went undefeated and won the SuperBowl. He was a lawyer, a sports enthusiast, and a savvy businessman. But when he died, he left behind a large estate with estate taxes owed in excess of $47,000,000 and no estate plan. As a result, his heirs went through a nightmare of troubled family relationships, eventually selling the football team at a bargain price… just to pay the tax.
By contrast, Jackie Onassis and Malcolm Forbes, through the clever use of trusts and life insurance, left behind vast fortunes and little to no tax liability.
How does life insurance fit in? Once an estate is tallied by the attorney and estate accountant, trusts are established to eliminate assets from the estate (such as charitable remainder trusts), a net taxable estate is arrived at, and the projected tax rate and income tax are calculated. the Heritage. eg An estate worth well in excess of the $2,000,000 annual estate tax exclusion is projected to pay $2.5 million in estate taxes.
The insurer produces what is called a survivorship or life insurance plan.
“second to die” policy that insures 2 people on one plan. The underwriting is usually simpler in 2 lifetimes instead of one, so a less healthy spouse may get a better premium due to the healthier spouse.
The death benefit is written based on the projected amount of estate taxes to be paid, $2.5 million in this case and the designated beneficiaries are the children; those who have 9 months to pay the wealth tax.
An irrevocable life insurance trust (ILIT) is then created to protect the policy and remove it from the estate. Remember, ownership of a life insurance policy creates an immediate asset to the estate. The ILIT holds the policy outside of the estate as an included asset.
On the death of the first spouse, no estate tax is due, so no death benefit is paid. Upon the death of the second spouse, estate tax is now due, the ILIT is dissolved, and the $2.5 million life policy proceeds are released. The beneficiaries now have the liquidity to pay the estate tax. They don’t have to worry about selling property just to pay taxes, family relationships are not changed by taxes, and estate assets are preserved.
Can this happen to you? Possibly. Let’s say you have a relative, let’s say Aunt Mary who has some kind of property. She has a house, a small business, retirement funds, collectibles like art, jewelry, cars or stamps, etc. and he never considered himself eligible to get over the $2 million estate tax exclusion because he thought to himself, “Hey…. I’m not rich!” Eventually, Aunt Mary dies leaving him with 100 acres of prime Maine real estate and the current value of that property takes him well above the estate tax exclusion and now his children would have to pay income tax. estate in 9 months if you die tomorrow. . I’ve seen it happen.
Hopefully, this article has given you an idea of what estate planning can be. Using an estate tax team comprised of an estate accountant, attorney, and life insurance broker will further protect all that you worked so hard to set aside for your family.