Life Insurance For Estate Protection

Will my estate have to pay taxes after I die?

It depends. The federal government imposes estate tax at your death only if your property is worth more than a certain amount, which depends on the year of death. But all property left to a spouse is exempt from the tax, as long as the spouse is a U.S. citizen. Estate tax is also not assessed on any property you leave to a tax-exempt charity.

Special rules apply to certain estates that contain family-owned businesses and farms, which may receive a special $1.3 million exclusion from estate tax. The rules for qualifying are complex; consult an estate planning specialist if you're interested. (This special exemption will become superfluous in 2004, when the individual exemption rises to $1.5 million.)

What are the rates for federal estate taxes?

The rates are steep, starting at 37%. The maximum is 55% for property worth over $3 million. The maximum rate is scheduled to decline gradually to 45% in 2009. There will be no estate tax in 2010, if the current tax law (passed in 2001) is not amended.

The ultimate goal of estate planning is to acquire and preserve someone's assets past death. This is goal is to be pursued after several major factors are decided:

·       Who are the beneficiaries?

·       How can you reduce or eliminate administration costs?

·       How can taxes be reduced or eliminated?                 

·      What is the estimated tax that will be owed?

The two major ways to start the estate planning process is to either create a will or a trust. Both are designed to determine who is the beneficiary of specific assets.  For more information on trusts or wills, contact a lawyer or certified accountant.

Some Insurance Solutions

There are several different types of insurance policy’s that can effectively solve the problem of estate tax burdens.  One of these is called Survivorship Life, it is a type of whole life insurance, which insures two people, and pays benefits only after the second person dies. It is generally designed to provide funds to pay estate taxes. Also called second-to-die life insurance, "joint and last survivor" and "last-do-die" insurance.  The proceeds of the policy become available at the second death when estate tax and estate settlement costs may cause an excessive financial burden

The federal tax laws governing survivorship life insurance is somewhat ambiguous. Because this is a new and complex area, you need to check with a good estate-planning lawyer with current knowledge of the tax rulings on this type of policy. Also, discuss this issue with your insurance agent to ensure your survivorship policy will have the effect you intend. It may be best to have the policy owned by a life insurance trust.

Survivorship life insurance policies are effectively used to offset the financial burden of estate taxes after the death of the final spouse. They do so because of a bill enacted in the early 1980's that allowed the postponement of estate taxes until the death of the second spouse. In addition, this type policy when owned by a third party (typically a trustee) prevents the insurance amount from being considered as part of the estate’s value.

Several other insurance solutions exist to achieve the same goal.  It is recommended that you speak with a knowledgeable estate or financial planner and discover all the options available. 

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Content is for informational purposes only and may not accurately reflect your specific situation. Information is not intended to provide legal, tax, or accounting advice. You should consult a qualified advisor for advice specific to your own circumstances.