After your death, all of the assets you held in your individual name at the time of your death will be listed on your Federal Estate Tax Return. If the value of his estate is above the estate tax threshold for that year, an estate tax will be due. In 2011, the estate tax threshold will be $1 million and the estate tax will be a whopping 55 (fifty-five) percent. Estate taxes must be paid in cash within nine (9) months of death. For every dollar over the first million, your estate will be taxed 55 cents. A million dollars may sound like a large amount of money, but it’s actually quite small when you consider that you include proceeds from life insurance, the equity in your home, stocks, bank accounts, retirement accounts, jewelry, paintings, and any anything else you want. may have had a title to his name at the time of his death.
One approach to providing cash available to pay these taxes and other expenses is through life insurance proceeds. The income can be paid to the federal government instead of your heirs having to liquidate assets to pay the estate tax bill. Life insurance provides a death benefit free of income taxes, but the value of the benefit is added to the total assets in the estate if it is not properly structured. This creates a never-ending cycle of taxes and insurance policies. The way to avoid this outcome, limit or eliminate your estate tax, and provide tax-free money to your beneficiaries is to hold life insurance policies in an irrevocable life insurance trust, or ILIT.
An ILIT combines the protection of a trust with the liquidity of life insurance benefits. Using the gift tax exclusion of $13,000 per year, you can donate assets to ILIT annually to cover insurance premiums without tax consequences. Upon your death, the income is transferred to your heirs free of all income taxes and estate taxes. This will provide the necessary liquidity your heirs will need to pay for your funeral costs, estate taxes, probate fees, and settlement costs.
Upon your death, the ILIT trustee will make appropriate distributions from cash income to cover debts, taxes and funeral expenses. The trustee could even buy some or all of the business from him with the cash proceeds and run it professionally until his children were old enough to take it over. The trustee may also make appropriate loans for the spouse, children, and business.
An ILIT provides flexibility and tax advantages. To learn more about ILITs and determine if they are the right vehicle for you, contact your South Florida estate planning attorney.