In two years and 9 ½ months, a "new and improved" source of income for the Federal Government will be born. At that time, the federal estate tax (called the "Death Tax" by some) will come back with a vengeance. Anyone who dies after January 1, 2011 will be subject to this tax if they have an estate worth over a million dollars. The family will get a dollar and the federal government will get a dollar, so on and so on, until the whole estate has been counted and divied up. For some estates the top rate rises to 60% so that the feds take most of the estate. Since life insurance is part of an estate for tax purposes, a whole lot of people and families are going to be adversely impacted.

How did this happen?

The Bush Administration wanted to kill off the "Death Tax" in the worst way but they didn't have the political muscle to do this. So the "Death Tax" has gone to sleep since 2003, with its impact being less and less onerous. On New Years Day in a couple of years, the "Death Tax" wakes up.

With a vengeance.

The tax rate goes up from 45% to 50% and this 50% taxable amount starts at $1,000,000. What can you do? What can you do?

There is a way to strip life insurance proceeds from your estate to avoid this. At our office we frequently set up irrevocable life insurance trusts (an "ILIT") to take life insurance out of the mix. If you set up an ILIT and get new insurance, you are all set. But what happens if you have existing life insurance and can't get a replacement policy because of a chronic illness? In that case, you have to set up an ILIT, put the insurance in the insurance trust and wait for 3 years for the tax avoidance to kick in. Since the "new and improved" death tax starts in 2 years and 9 months, you need to start now. Give us a call.

Michael A. Robinson is an attorney practicing in Castle Rock at 900 W. Castleton Road, Castle Rock, CO 80109, ph. 303-688-0944.