The "Death Tax" (the Federal Estate Tax) will be reborn in two years and 9 months. Anyone who dies after January 1, 2011 will be subject to this tax if they have an estate worth over a million dollars. Life Insurance is part of the estate for tax purposes. 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 the estate, a whole lot of people and families are going to be adversely impacted.
A previous Yourhub article talked about a way to strip life insurance from the estate to lower estate taxes. There is another tool you can use to help lessen the estate tax bite.
You can redo your will as a
Marital Deduction Will (MD Trust Will).
With an MD Trust Will, you set aside the maximum exemption amount allowed under the tax law at time of death to go to your surviving spouse in trust. The trust principal is earmarked to ulitimately go to the couple's children. The surviving spouse controls this trust and gets to spend any income the trust generates.
When the surviving spouse dies, the full exemption (for example $1,000,000) would apply to the surviving spouse' estate for tax purposes. The first Trust amount has already avoided taxation. Only the amount over the surviving spouse' exemption would be subject to estate tax.
Simply put, using an MD Trust Will instead of a normal Will effectively doubles the exemption amount. If an MD Trust is combined with stripping life insurance out of the estate by using an Irrevocable Life Insurance Trust (ILIT), you can shield a significant amount of an estate from Death Taxes.
These two tools, the MD Trust and the ILIT, are the simplest ways to lessen the estate tax bite. There are other tools that can be used but they have tradeoffs that require a good "cost-benefit" analysis before using them. If you want to explore this subject further, please 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.
DISCLAIMER - Don't consider this article as tax advice. You should always consult with a CPA before taking any drastic tax-impacting steps.