What is an estate?

An estate consists of all of the assets and liabilities owned by an individual.  Upon death, the distribution of that property can be more readily defined by the terms of a will or trust.  The proper planning of that process can have substantial impact on the amount to be paid in taxes prior to distribution (in effect, a distribution to the population base of the entire country), and the amount left over to be paid to your family.  The amount owed to the government is known as the estate tax (also commonly referred to as the inheritance tax).

How is a trust used in estate planning?

The use of a trust can be a tool which significantly reduces the estate tax liability, and the trustee holds the legal title to the property which has been transferred into the trust.  The trust can be revocable (the terms of the trust can be changed at any time), or the trust can be irrevocable (the terms can never be changed).  An Irrevocable Life Insurance Trust is also known as an “ILIT.”

How is the value of the estate calculated?

A marital deduction is allowed when property owned by an individual is transferred directly to the spouse, but the entire value of the property becomes part of the spouse’s total estate.  Upon the death of the spouse (the second death between husband and wife), the value of the entire combined estate then becomes the basis for calculating the estate tax due at that time.  The estate tax must be paid within nine months of the date of death of the spouse.

How can I maximize my exemptions?

The use of a bypass trust can double the exemption permitted for the calculation of the estate tax as applied.  There are a number of strategies, including the use of other trusts, which can be designed to minimize the estate tax due on the second death.

What are the current estate tax laws and how will they effect my family?

The 2009 estate tax exemption for calculation of the tax was $3,500,000.  If a bypass trust had been incorporated into the planning process, the exemption was doubled to $7,000,000.  Thus, the total value of the estate would have had to exceed the $7,000,000 level before any estate tax would be levied.

Unfortunately, the $3,500,000 exemption expired at the end of 2009.  While the current laws do not assign a tax in the year 2010 for transfer of assets in the estate upon the second death (husband and wife), the values assumed by the beneficiary (e.g., the children) will be assigned according to the cost basis of the property.  Thus, if the cost basis of the property purchased by the parents was $100,000, and the children sold the property for $1,000,000, the children would be required to pay the tax on the excess over the cost basis ($900,000).

In the year 2011, the exemption returns to $1,000,000, and a step-up in basis is then assigned after calculation of the estate tax to be paid (or $2,000,000 if a bypass trust has been part of the distribution process).  If the cost basis of the property purchased by the parents was $100,000, and the children sold the property for $1,000,000, they would keep the entire $1,000,000 (since the higher step up in basis value was used to calculate an estate tax in 2011 – the estate tax calculation wasn’t required in 2010).

Congress is aware of the estate tax issues, and plans to address the changes in further detail.  Other issues, of course, have become more pressing, and the estate tax legislation may be reviewed in 2010.

In 2020, the estate tax exemption is $11.58 million per individual – up from $11.4 million per individual in 2019.

What happens if I can’t pay the Estate Tax?

If the value of the estate exceeds the exemption, you must pay the tax within a nine month period.  In short, you are using 100% of your after-tax money (the funds you have accumulated over the years after taxes have been paid) to pay a second tax.  You therefore have choices – you can use 100% of your own after-tax money to pay a second tax, or you can use somebody else’s money to pay the tax for you.

At death, you take a snapshot of your estate (assets and liabilities) to calculate the tax for distribution to the next generation.  Many people have fixed assets that can’t be liquidated (e.g., real estate) to pay the tax that is owed – you remain property rich and cash poor.  If the property can’t be liquidated, the IRS comes in and takes care of the matter for you.  If they seize the property as part of the tax liability, the value paid for the property (when sold) may be far less than you feel the property is worth.  The remaining balance left over for the family (children) may therefore be significantly below the true market value.

Real estate, of course, has value well beyond the liquidation price of today’s market.  The continued use of the property can be a source of income to the beneficiaries, as well as a source of future growth for the children and grandchildren.

It is therefore helpful to consider estate planning techniques which can dramatically minimize your estate tax liability.

How can I minimize the Estate Tax that I pay out of my own pocket?

Many people in the estate planning process look to alternatives which can substantially reduce the tax owed upon the second death (husband and wife).  Once that process has maxed out the reduction of the potential tax liability, you may still find a tax due to be paid within the required nine month period.

One very common approach is to let someone else pay the tax for you – an insurance company.  The first step in the process is to set up an irrevocable life insurance trust (ILIT), and then take a look at what property will go inside of the trust.  A survivorship (second-to-die) insurance policy will do the trick – it will insure both husband and wife, at a cost that can be less than one cent on the dollar each year.

The trustee of the ILIT owns the survivorship life policy, the trustee is the beneficiary, and the proceeds go directly into the irrevocable life insurance trust when paid.  The monies in the trust are then used to purchase the property to pay the taxes due – the properties are then distributed according to the trust document.

It should be noted that the irrevocable life insurance trust is treated as a separate entity and is not included at all in the estate for calculation of the estate tax due upon death.  When revocable (vs. irrevocable) trusts are used in the planning process, all of the property inside of the trusts remain as part of the estate for tax calculation purposes.  A combination of benefits is therefore helpful when determining which alternatives best serve your needs.

How can I get a quote for a survivorship life insurance policy?

Given the more complex nature of the estate planning process, it would be best to give us a call at 1-888-972-0024 or CLICK HERE to e-mail us 24 hours a day so we can help you review your personal situation in further detail and set up the policy that best suits your individual needs.