As the new year approaches, many of you with large estates may be wondering what the Feds have planned for estate and gift tax exemptions for 2016.
Will the limits be increased or stay the same?
We can answer this for you, and more importantly, what this means to you and your estate planning goals.
The Feds have announced that the estate and gift tax exemption for 2016 will be raised to $5.45 million which is an increase from the $5.43 million in 2015.
In this article, we’ll uncover how this affects you and how you can better plan your estate’s affairs for 2016 and beyond.
Quick Guide to Life Insurance Estate Tax for 2106 & Beyond
- What Is the Estate Tax and Gift Tax Exemption?
- Some Misconceptions About Gift Tax Exemptions
- Life Insurance and Estate Taxes
- Protect Your Estate and Life Insurance Proceeds with an Irrevocable Life Insurance Trust
- Find Out More Information About Life Insurance and Estates
At the beginning of 2016 an individual can now leave as much as $5.45 million to their heirs without having to pay federal estate taxes or gift taxes. Any assets which exceed this amount could be subject to a 40% estate tax.
A couple that is married will be allowed to protect as much as $10.9 million in assets ($5.45 million each) without having to pay federal estate taxes or gift taxes. But beware, portability can cause some unexpected tax issues, so speak with an experienced financial adviser or estate lawyer first.
(Important Point) – Keep in mind that a number of states also have their own estate or death taxes and some of these are set around the $1.0 million level, so make sure you aware of your what state has regulated so your heirs and beneficiaries aren’t caught short.
For the gift tax exemptions exclusion, the amount will remain the same in 2016 at $14,000.
Although the gift tax exemption is set at $14,000 there is some misunderstanding about how this exemption might be used.
First of all, you can give more that $14,000 in any year to one or more individuals without being “taxed” on the money. That is to say, neither the gift giver or recipient will pay income taxes for the gift the year it was gifted.
Instead, it affects the lifetime gift tax exemption of the gift giver.
Any amount that you give as a gift above $14,000 will simply be deducted from the estate tax and gift tax exemption of $5.45 million when you die, but it is not taxable when you give a gift above that amount. The IRS will simply keep track of any gifts paid above the exemption limit and deduct that amount from the total allowable estate and gift tax exemptions.
The second thing to keep in mind is that both you and you spouse can also make multiple gifts of $14,000 to particular individuals. So, if you had 4 grandkids, you and your spouse could give each grandchild $14,000 for a total of $112,000 per year with no penalty.
But, keep in mind that a “federal kiddies’ tax” does exist which you should investigate before you send out those gifts to see whether or not it applies to your personal situation.
Is life insurance subject to estate tax? Some people who have just recently come into or currently possess large estates, and who retain life insurance, might not be aware of how life insurance proceeds can affect estate taxes.
Make sure that your life insurance proceeds are distributed properly, or you could mistakenly believe that they will not be taxable (in most instances they not) – when the actually are!
There are 5 possible circumstances when life insurance may be included as part of the estate:
• The life insurance proceeds are made payable to the executor of the estate
• A transfer of ownership of the policy occurs within 3 years of the death of the policy owner
• The deceased was in possession of a policy which had an “incident of ownership” (meaning that they had the right to name, assign or terminate beneficiaries)
• The policy is owned by the insured or the spouse
• The policy is owned by a Revocable Trust
You have to be careful to not simply assume that your beneficiaries will avoid taxation issues when they receive the proceeds of a life insurance policy, especially if the amount received takes them above and beyond the Federal estate and gift tax exemption limits.
One of the easiest ways to protect your beneficiaries and shelter the proceeds of a life insurance policy, thus avoiding future tax complications, is to set up an “Irrevocable Life Insurance Trust.”
Why? Very simply put, if you assign ownership of your life insurance policy to an ILIT, the proceeds are NOT included as
assets in the estate and are not subject to either Federal or state taxes.
In this scenario, the grantor (owner or purchaser of the policy) gives the trust responsible for the ILIT complete control and ownership of the policy and power to distribute the proceeds. These details may be arranged in advance.
You may use an ILIT to provide immediate asset liquidity for your heirs to manage any debts, expenses or estate taxes owed.
Life insurance policies owned by an ILIT can be structured to pay proceeds immediately, or a trust may be set up to determine and manage when and how much money your heirs and beneficiaries should receive.
However, before proceeding with an ILIT, it’s a good idea to talk with an experienced estate attorney to understand the best way to set up an ILIT that suits your particular circumstances.
We would be very happy to provide you with all the information you need on which type of life insurance policy would be best if you have a large estate and how to use this information to your maximize your unique advantage.
To learn more about how to use life insurance for a large estate, call me at 877 – 443 – 9467 today and I will answer all your questions!
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