Presently, there are no taxes on estates that are under $5 million. This changes on January 1, 2013. Beginning in January, if you die with an estate of over $1 million, the estate will be taxed at a rate of 55 percent. In other words, over half of your estate will be paid to the government for estate taxes.
Considering that the value of an estate is the sum of personal property, your home, business interests, life insurance death benefits, deferred compensation, stock options, IRAs, retirement plans,401(k)s, investments, real estate, bank accounts, etc., many people will quickly find themselves with a potential estate tax problem in 2013. Tax planning with an attorney can greatly reduce or eliminate estate tax exposure.
There are many methods for reducing the value of an estate for estate tax purposes. The tax planning method chosen will depend on the assets of the individual and the goals and wishes of the individual. One method of handling estate taxes is through the use of an irrevocable life insurance trust.
The use of the life insurance trust, by itself, does not reduce estate tax exposure; however, it does provide the fund to pay for estate taxes. This technique uses a life insurance policy in the amount of the estate tax exposure.
The policy will be owned by the trust. Because the irrevocable trust owns the life insurance policy, the proceeds of the policy will not be included in the person's estate when he or she dies. The trustee collects the life insurance proceeds at the person's death and uses the proceeds to pay the estate taxes that the family would otherwise be forced to pay. By doing this, the family is able to keep all estate assets rather than losing 55 percent of the estate value over the limit to taxes. This technique can be used by itself or with other techniques that reduce the estate tax exposure.
Editor’s Note: Melanie B. Bradford is an attorney located in Scottsboro, Alabama at 803 Garland Ferry Road at the intersection of Veterans Drive and Garland Ferry near The Daily Sentinel. Her phone number is 256-259-3301. The Alabama State Bar requires any communication that may be interpreted as an ad to state: “No representation is made about the quality of legal services to be performed is greater than the quality of legal services performed by other lawyers.”