In the past planning to minimize or eliminate estate taxes was somewhat of a difficult endeavor as it was a two-step process.
The first step would be to create an AB trust, also known as a credit shelter trust, which takes time and money and must be set up by a qualified estate planning attorney.
… You wouldn’t want Legal Zoom to set up this type of trust for you.
Step 2 – Life Insurance to Fund the Trust
After step one, the second phase would usually involve purchasing a life insurance policy to pay for whatever taxes remain after the second spouse’s death from step one.
In the recent tax legislation changes, the need for step one was mostly eliminated.
The purpose in creating the AB trust was to take the estate tax exclusion amount of $5,000,000 (in 2012) to ensure that both spouses enjoyed the entire $5,000,000 estate tax exclusion (increased to $5,250,000 in 2013), therefore doubling the amount of assets a married couple could pass onto their heir’s estate tax-free.
A new feature called portability has eliminated the need for a trust to perform this function. In other words, the $5,250,000 estate tax exclusion amount is automatically applied to the estate upon the death of the second spouse.
This ensures that a full $10,500,000 would be excluded from estate taxes on any married couple.
Note: Consult an attorney about your need for a trust. There are many other reasons to hold your assets in a trust. We’re just saying you no longer need one for the sole purpose of protecting the first spouse’s exclusion amount.
Now All We Need is Life Insurance to Pay for Estate Taxes
That makes estate tax planning quite simple now.
If you have an estate worth $10,500,000 or more, or even nearing $10,500,000, all you need to do is buy life insurance to cover any estate taxes that may be due upon the second spouses passing.
The new tax rate beyond $10,500,000 for estate taxes is 40%, so let’s look at a simple example. If you have an estate valued at $11,500,000 upon the death of a second spouse the first $10,500,000 will be excluded from estate taxes, but $1,000,000 will be taxed at the top estate tax rate of 40%, meaning the estate would owe $400,000 in estate tax.
Most prudent affluent people, if in good health, would agree it makes more sense to pay for this estate tax bill with life insurance instead of out of the estate’s pocket. Second to die policies are a very common way of paying this estate tax bill.
Call us for a quote on second to die policies at 877-443-9467.
For example, if you have a husband and wife both age 60 in good health, they could get a $400,000 policy which would pay out upon the second spouse’s death for less than $10,000 of annual premium.
Of course this premium could fluctuate depending on their health, but if we call it $10,000 and assume the two of them will live for 20 years they’ve now put in $200,000 into the premiums when $400,000 for a doubling the premium paid will be paid out at second spouse’s death.
This equals a terrific rate of return, much better than putting your money away in the money market waiting to eventually pay that tax bill where it’s currently earning less than 1%.
What if my estate falls below the threshold?
Keep in mind the $5,250,000 exclusion amount per person is a federal exclusion amount. With the increase in the federal amount you can exclude, you can be sure States will be looking to charge death taxes, if they aren’t already.
Tom Herman from the Wall Street Journal recently wrote about the 2013 tax changes, and quoted Catherine Grevers Schmidt from Patterson Belknap Webb & Tyler LLP as follows:
Even if your estate falls below the federal threshold, don’t automatically ignore the subject. “With the increasing federal estate-tax exclusion, there will be an increased focus on state estate taxes in states which impose an estate tax,” Ms. Schmidt says.
Call us with your unique estate planning questions
Every estate plan is unique and different, so as always please call us with your specific situation so that we can recommend the most suitable plan for you. Please note we also work with estate planning attorneys and tax professionals to ensure a high level of planning for you and your family.
Please call us here at the office at 877-443-9467 for a complimentary estate plan review. We look forward to hearing from you.*Written by Chris Huntley. Huntley Wealth Insurance and its representatives do not give legal or tax advice. Please consult your own legal or tax adviser.