Tax Liability Could Come Down to Who Owns Your Life Insurance
Small–business owners are an easy target for the estate tax. They are often worth enough that their estates could be subject to the death levy, but they may not be so well off that they have access to the tools used by the überwealthy to help shield their assets.
In 2007 and 2008, all estate assets that remain after exercising the $2 million exemption are subject to a 45% tax rate. In 2009, the exemption jumps to $3.5 million, but the tax rate remains at 45%. The estate tax is scheduled to be repealed in 2010, but unless Congress passes further legislation, the federal estate tax will be back in full force in 2011.
Life insurance is one common way to help pay estate taxes, but did you know that the death benefit is counted as part of your estate, unless you take deliberate steps to ensure it does not enter into the estate tax calculation?
Control and Retain
A properly structured irrevocable life insurance trust (ILIT) can be used to purchase and hold a life insurance policy outside of your estate. Because the policy is owned by the trust, the proceeds are not considered part of your personal estate and thus are not used to calculate estate taxes.
Although the trust is irrevocable once it is in place, you still retain control of the insurance policy. Your beneficiaries can use the policy proceeds to pay ongoing business expenses, help settle estate taxes, buy your business and keep it running, or pay expenses associated with selling your business.
The cost and availability of life insurance depend on factors such as age, health, and the type and amount of insurance purchased. As with most financial decisions, there are expenses associated with the purchase of life insurance. Policies commonly have mortality and expense charges. If a policy is surrendered pre–maturely, there may be surrender charges and income tax implications. Before implementing a strategy involving life insurance, it would be wise to make sure that you are insurable.
If you are concerned about estate taxes, an ILIT might be the way to go. We can help you evaluate your options.
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