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2010………..N/A (repealed)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.

The URI to TrackBack this entry is: https://ankerhymesschreiberllp.com/2011/07/25/understanding-life-insurance-trusts-how-to-reduce-or-eliminate-your-estate-tax-cost/trackback/

RSS feed for comments on this post.

2 CommentsLeave a comment

  1. Life insurance is a contract between an insurance policy holder and an insurer, where the insurer promises to pay a designated beneficiary sum of money (the “benefits”) upon the death of the insured person. Depending on the contract, other events such as terminal illness or critical illness may also trigger payment.

    Hope This Helps!

  2. Thanks for your personal marvelous posting!
    I seriously enjoyed reading it, you may be a great author.
    I will remember to bookmark your blog and may come back down the road.
    I want to encourage yourself to continue your great work, have a nice morning!


Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s