7 Benefits of a Life Insurance Trust

  1. Provides immediate cash to pay estate taxes and other expenses after death.
  2. Reduces estate taxes by removing insurance from your estate.
  3. Inexpensive way to pay estate taxes.
  4. Proceeds avoid probate and are free from income and estate taxes.
  5. Gives you maximum control over insurance policy and how proceeds are used.
  6. Can provide income to spouse without insurance proceeds being included in spouse’s estate.
  7. Prevents court from controlling insurance proceeds if beneficiary is incapacitated.

For more information about Life Insurance Trusts, you can contact our Estate Planning Attorney in Woodland Hills, Los Angeles today.

Understanding Life Insurance Trusts: Can I be my own trustee?

This is part 2 of the blog series discussing life insurance trusts and estate taxes

6. What if my estate is larger than this?

 I) If the trust buys the insurance, it will not be included in your estate. So the proceeds, which are not subject to probate or income taxes, will also be free from estate taxes.

II) Insurance proceeds are available right after you die. So your assets will not have to be liquidated to pay estate taxes.

III) Life insurance can be an inexpensive way to pay estate taxes and other expenses. So you can leave more to your loved ones.

7. How does an irrevocable insurance trust work?

An insurance trust has three components. The grantor is the person creating the trust – that’s you. The trustee you select manages the trust. And the trust beneficiaries you name will receive the trust assets after you die.

The trustee purchases an insurance policy, with you as the insured, and the trust as owner and (usually) beneficiary. When the insurance benefit is paid after your death, the trustee will collect the funds, make them available to pay estate taxes and/or other expenses (including debts, legal fees, probate costs, and income taxes that may be due on IRAs and other retirement benefits), and then distribute them to the trust beneficiaries as you have instructed.

8. Can I be my own trustee?

Not if you want the tax advantages we’ve explained. Some people name their spouse and/or adult children as trustee(s), but often they don’t have enough time or experience. Many people choose a corporate trustee (bank or trust company) because they are experienced with these trusts. A corporate trustee will make sure the trust is properly administered and the insurance premiums promptly paid.

9. Why not just name someone else as owner of my insurance policy?

If someone else, like your spouse or adult child, owns a policy on your life and dies first, the cash/termination value will be in his/her taxable estate. That doesn’t help much.

But, more importantly, if someone else owns the policy, you lose control. This person could change the beneficiary, take the cash value, or even cancel the policy, leaving you with no insurance. You may trust this person now, but you could have problems later on. The policy could even be garnished to help satisfy the other person’s creditors. An insurance trust is safer – it lets you reduce estate taxes and keep control.

For additional questions on life insurance trusts and estate taxes, please contact our Estate Planning Lawyer in Woodland Hills, Ca today.

Understanding Life Insurance Trusts: How to Reduce or Eliminate Your Estate Tax Cost

This blog series will go through questions that are often asked by our clients when discussing life insurance trusts and estate taxes.

1. What does a life insurance trust do?

An irrevocable life insurance trust lets you reduce or even eliminate estate taxes, so more of your estate can go to your loved ones. It also gives you more control over your insurance policies and the money that is paid from them.

2. What are estate taxes?

Estate taxes are different from, and in addition to, probate expenses and final income taxes (which must be paid on any income you receive in the year you die). Some states also have their own death/inheritance taxes.
Federal estate taxes are expensive – the rate is 46% in 2006, 45% in 2007 and 2008 – and they must be paid in cash, usually within nine months after you die. Since few estates have this kind of cash, assets often have to be liquidated. But estate taxes can be substantially reduced or even eliminated – if you plan ahead.

3. Who has to pay estate taxes?

Your estate will have to pay estate taxes if its net value when you die is more than the “exempt” amount set by Congress at that time. Here is the current schedule:

Year of Death………..Estate Tax “Exemption”

2006, 2007 & 2008………..$2 million

2009………..$3.5 million

2010………..N/A (repealed)

2011 and thereafter………..$1 million

4. What makes up my net estate?

To determine your current net estate, add your assets then subtract your debts. Many people are surprised that insurance policies in which they have any “incidents of ownership” are included in their taxable estates. This includes policies you can borrow against, assign or cancel, or for which you can revoke an assignment, or can name or change the beneficiary.
You can see how life insurance can increase the size of your estate–and the amount of estate taxes that must be paid.

5. How does an insurance trust reduce estate taxes?

The insurance trust owns your insurance policies for you. Since you don’t personally own the insurance or have any “incidents of ownership,” it will not be included in your estate — so your estate taxes are reduced.

Let’s say you are married, with a combined net estate of $5 million, $1 million of which is life insurance. With a tax planning provision in a revocable living trust or will, you can protect up to $4 million in 2006-2008 from estate taxes. But if you die in 2006, your estate would have to pay $460,000 in estate taxes on the additional $1 million ($450,000 in 2007 and 2008). With an insurance trust, the $1 million in insurance would not be in your estate. That would save your family at least $450,000 in estate taxes.

For additional questions on life insurance trusts and estate taxes, please contact our Estate Planning Attorney in Woodland Hills, Ca today.

Tax-Free Gifts and the Irrevocable Life Insurance Trust (ILIT) : Reducing the Estate Tax

Tax-Free Gifts

This is easy and it doesn’t cost anything. Each year, you can give up to $12,000 ($24,000 if married) to as many people as you wish. So if you give $12,000 to each of your two children and five grandchildren, you will reduce your estate by $84,000 (7 x $12,000) a year – $168,000 if your spouse joins you. (This amount is now tied to inflation and may increase every few years.)

If you give more than this, the excess will be considered a taxable gift and will be applied to your $1 million gift tax exemption. Charitable gifts are unlimited. So are gifts for tuition and medical expenses if you give directly to the institution.

Irrevocable Life Insurance Trust (ILIT)

An easy way to remove life insurance from your estate is to make an ILIT the owner of the policies. As long as you live three years after the transfer of an existing policy, the death benefits will not be included in your estate.

Usually the ILIT is also beneficiary of the policy, giving you the option of keeping the proceeds in the trust for years, with periodic distributions to your spouse, children and grandchildren. Proceeds kept in the trust are protected from irresponsible spending and creditors, even ex-spouses.

For more information on-free gifts, irrevocable life insurance trusts and reducing your estate tax, please contact our experienced Estate Planning Attorney in Woodland Hills.

Enhanced by Zemanta

Removing Assets from your Estate to Reduce the Estate Tax

Removing assets from your estate is a great way to reduce estate taxes before you die.

So, spend some and enjoy it!

Also, you probably know whom you want to have your assets after you die. If you can afford it, why not give them some assets now and save estate taxes? It can be very satisfying to see the results of your gifts– something you can’t do if you keep everything until you die. Appreciating assets are usually best to give, because the asset and future appreciation will be out of your estate.

Assets you give away keep your cost basis (what you paid), so the recipients may have to pay capital gains tax when they sell. But the top capital gains rate is only 15% (assets held at least 12 months). That’s a lot less than estate taxes (45-46%) if you keep the assets until you die.

Some of the most commonly-used strategies to remove assets from estates are explained below. Note that these are all irrevocable, so you can’t change your mind later.

  1. Tax-Free Gifts
  2. Irrevocable Life Insurance Trust (ILIT)
  3. Qualified Personal Residence Trust (QPRT)
  4. Grantor Retained Annuity Trust (GRAT) and Grantor Retained Unitrust (GRUT)
  5. Family Limited Partnership (FLP) and Limited Liability Company (LLC)
  6. Charitable Remainder Trust (CRT)
  7. Charitable Lead Trust (CLT)
  8. Buying Life Insurance

Detailed explanations of each of these strategies for removing assets from your estate will be explained in the upcoming blog entries.  For questions on reducing your estate tax, please contact our experienced Estate Planning Attorney in Woodland Hills.

Enhanced by Zemanta

Understanding Estate Taxes: Net Value, Reduction/Elimination and Exemptions

Signing of tax exemptions for 2014 FIFA World ...

Image via Wikipedia

How is the net value of my estate determined?

To determine the current net value, add your assets, then subtract your debts. Include your home, business interests, bank accounts, investments, personal property, IRAs, retirement plans and death benefits from your life insurance.

How can I reduce or eliminate my estate taxes?

In the simplest terms, there are three ways:

1. If you are married, use both estate tax exemptions

2. Remove assets from your estate before you die

3. Buy life insurance to replace assets given to charity and/or pay any remaining estate taxes

Using Both Exemptions

If your spouse is a U.S. citizen, you can leave him or her an unlimited amount when you die with no estate tax. But this can be a tax trap, because it wastes an exemption.

Let’s say, for example, that Bob and Sue together have a net estate of $4 million and they both die in 2006. Bob dies first. He leaves everything to Sue, so no estate taxes are due then. When Sue dies, her estate of $4 million uses her $2 million exemption. The tax bill on the remaining $2 million is $920,000! ($900,000 in 2007 and 2008.)

But if, instead, Bob and Sue plan ahead, they can use both their exemptions and pay no estate taxes. A tax planning provision in their living trust splits their $4 million estate into two trusts of $2 million each. When Bob dies, his trust uses his $2 million exemption. When Sue dies, her trust uses her $2 million exemption. This reduces their taxable estate to $0, so the full $4 million can go to their loved ones.

This planning can also be done in a will, but you would not avoid probate or enjoy the other benefits of a living trust.  Speak with an experienced Estate Planning Attorney in Los Angeles today to plan for your estate taxes.

Enhanced by Zemanta

Understanding Estate Taxes: Who Has to Pay Estate Taxes?

Who has to pay estate taxes?

Depending on how much you own when you die, your estate may have to pay estate taxes before your assets can be fully distributed. Estate taxes are different from, and in addition to, probate expenses (which can be avoided with a revocable living trust) and final income taxes (on income you receive in the year you die). Some states also have their own death/inheritance taxes.

Federal estate taxes are expensive – the rate is 46% in 2006, 45% in 2007 and 2008 – and they must be paid in cash, usually within nine months after you die. Since few estates have this kind of cash, assets often have to be liquidated. But estate taxes can be substantially reduced or even eliminated – if you plan ahead.

Your estate will have to pay estate taxes if its net value when you die is more than the “exempt” amount set by Congress at that time.

Here is the current schedule:

Year of Death                    “Exemption” Amount

2006, 2007 & 2008        $2 million

2009                                     $3.5 million

2010                                     N/A (repealed)

2011 and thereafter         $1 million

For additional questions about estate tax law, speak with our experienced Estate Lawyer in Los Angeles today.

Summary of Living Trust Benefits

The Main Benefits of a Living Trust:

• Avoids probate at death, including multiple probates if you own property in other states

• Prevents court control of assets at incapacity

• Brings all your assets together under one plan

• Provides maximum privacy

• Quicker distribution of assets to beneficiaries

• Assets can remain in trust until you want beneficiaries to inherit

• Can reduce or eliminate estate taxes

• Inexpensive, easy to set up and maintain

• Can be changed or cancelled at any time

• Difficult to contest

• Prevents court control of minors’ inheritances

• Can protect dependents with special needs

• Prevents unintentional disinheriting and other problems of joint ownership

• Professional management with corporate trustee

• Peace of mind

For additional questions about living trust, please review our blog series entitled “Understanding Living Trusts: How you can Avoid Probate, Save Taxes and More FAQ” or speak with our Living Trust Attorney in Los Angeles.

Summary of The 2010 Tax Act

To summarize, the 2010 Tax Act makes significant estate and gift tax changes.  Almost every estate plan needs to be rewritten immediately.  The key points discussed above in the blog series include the following:

  • The estate tax exclusion amount increase to $5 million per person for 2010 through 2012.
  • The gift tax is reunified with the estate tax, and up to $5 million in lifetime gifts will be exempt (over and above the annual gift tax exclusion of $13,000 per donor for every donee each year).  Taxable gifts would be taxed at a top rate of 35 percent.  One would certainly have to make a very large gift to fall into the taxable range.
  • The maximum estate and gift tax rate is reduced from the 55 percent maximum rate under prior law to a maximum estate and gift tax rate of 35 percent for 2011 and 2012.
  • A “portability” provision is included, which allows surviving spouses to use any applicable exclusion amount that is not used by the first spouse to pass away.  This is not only true of very large estates, but also of those smaller estate plans that were drafted when the exemption was smaller and credit shelter trusts and outright bequests were drafted with maximum language.  The net result when such documents are interpreted under the new rules would be to pass entire estates into credit shelter trusts and not provide for other beneficiaries, perhaps not even for spouses.
  • The GST exemption amount is increased to $5 million for 2010 through 2012.
  • The Act sunsets at the end of 2012, thus making the foregoing changes temporary in nature.

As always, we recommend that clients review their estate plans periodically and/or whenever a significant life event occurs (e.g., birth of a child, death of a spouse, purchase of new home, etc.).

For clients with substantial amounts of wealth and with closely held businesses, we highly recommend that such clients consider using lifetime gifts to take advantage of the current $5 million lifetime gift tax applicable exclusion amount, which will expire absent further Congressional action at the end of 2012.

As more becomes known about this Act, we will be available to discuss it further.  If we can be of assistance to you in the area of income tax or estate/gift tax planning, or, if you have any questions or wish to discuss your estate plan in light of the Act, please do not hesitate to contact us.

Please call our office at (818) 501-5800 at your earliest convenience, and we will gladly schedule time to meet with you and review your estate planning documents.  In some cases, no changes will be required.  In others, we will recommend changes.  We cannot know, in advance, whether your documents will require changes to best take advantage of the current state of the estate tax law until we have a chance to review your documents with you.

Nonetheless, we strongly believe that it is important that your estate planning documents produce the result you want.

Start reading from the beginning of this blog series on the 2010 Tax Act:

Important Estate Tax Aspects of the 2010 Tax Act (the “Act”)

What’s NOT in The 2010 Tax Act

There are two key provisions that many commentators feared would be in the 2010 Tax Act, but which were not included in it.

Specifically, there have been several proposals to place limits on Grantor Retained Annuity Trusts (“GRATs”), which allow individuals to transfer wealth out of their estates with as little as a zero estate or gift tax cost that would have made GRATs less valuable from an estate planning perspective.  There have also been several proposals to limit valuation discounts in connection with certain estate planning techniques such as family limited partnerships. There were no such provisions included in the Act.  Therefore, these techniques continue to be available to move wealth to lower generations.

Temporary Relief Does Not Extend to Non-US Citizens Who Are Not Residents for Estate Tax Purposes

The Act reinstates federal estate taxes on United States-situs property of non-US citizens who are not residents.  The increase of the applicable exclusion amount to $5 million per person does not apply to non-US citizens who are not residents. US situs property exceeding $60,000 in value is currently subject to US estate taxes beginning at graduated marginal rates starting at 18 percent.  Accordingly, particular vigilance needs to be exercised in structuring the acquisition of US assets such as real property, so as to avoid imposition of US estate taxes at pre-2010 levels.

Contact our Estate Planning Lawyer in Los Angeles today to review your estate plan.

Continue to final post in blog series:

Summary of The 2010 Tax Act
Follow

Get every new post delivered to your Inbox.