Does the down economy make this a good time to remove assets from your estate?
Many asset values are ‘depressed,’ or at least a lot lower than just a few years ago. So now could be a good time because you would be removing them from your estate at a lower value, which has less of an impact in terms of gift tax consequences. If your $1 million business has taken a hit and is now valued at $700,000, you can remove from your estate a $700,000 asset that could soon be back to be worth $1 million. In effect, this would ‘save’ you $300,000 of future tax-free gifting. The bottom line is that if you can get an asset out of your estate that has the potential for high appreciation, or one that is appreciating quickly, it may be a good idea to do so now.
What can be done to pay for those high estate taxes?
Life insurance is a traditional — and popular — way to help pay for estate taxes. Other ways of paying estate taxes are for your executors to use any available cash, sell assets or borrow money.
When life insurance is used, it is typically owned by a trust that you set up — so that the death benefit is not included in your taxable estate, which if you owned, would just compound the problem. Many people do not realize if you own a life insurance policy on your life, the death benefit is included in your taxable estate.
Let’s look at an example. If your heirs need cash to pay estate taxes because your estate contains illiquid real estate or the business that they (you) do not want to sell, the proceeds from the death benefit can be used to help pay the taxes. In addition, the cash generated by the life insurance death benefit might come in handy when income taxes have to be paid on inherited IRAs.
Some people are insurance averse; but once they understand that it is difficult to invest those dollars and get the rate of return they would get leveraging the insurance company dollars via the death benefit, an irrevocable life insurance trust technique could be a wise business decision. This is a simple way to make the estate ‘whole’ and keep life insurance out of the estate so it is not taxed and everyone benefits.
Douglas Sockman, CFP®, ChFC, CLU, is a financial advisor at Skylight Financial Group and a member of their Advanced Planning Team specializing in personal financial planning and serving small business owners. Reach him at [email protected] or (216) 592-7316. Douglas Sockman is a registered representative of and offers securities, investment advisory and financial planning service through MML Investors Services, Inc. Member SIPC. 1660 W. 2nd St. Ste 850. Cleveland, OH 44113. 216-681-5680. CRN201209-139871.
The Economic Growth and Tax Relief Reconciliation Act of 2001 contains a ‘sunset’ provision that repeals the estate and gift tax provisions of this Act as of January 1, 2011. Consequently, all estate and gift tax code changes made under the Act will then revert to their status prior to enactment. Unless there is further legislation, these provisions will only be effective through the year 2010. The information provided herein is not written or intended as tax or legal advice and may not be relied on for purposes of avoiding any federal tax penalties. Entities or persons distributing this information are not authorized to give tax or legal advice. Individuals are encouraged to seek specific advice from their personal tax or legal counsel.
