For the affluent, depending on your gross estate, everything you own may be subject to tax upon your death. The taxes that must be paid to the federal government are called estate taxes. A smaller but still substantial amount that may have to be paid to the state in which you live is called an inheritance tax. While the laws regarding taxes are complicated, generally though, transfers between spouses at death are not subject to tax liability. Conversely, when the surviving spouse passes the estate to their heirs, often the children, that is when the tax is imposed and at a high rate. Typically this tax has to be paid within nine months of the death.
What can you do about estate taxes?
First, if you are affluent you need to consultant with an attorney or an accountant. Your financial or legal adviser will often recommend that you purchase life insurance and set up a life insurance trust as part of your estate plan. By establishing an Irrevocable Life Insurance Trust (ILIT), if set up correctly, the life insurance is not owned by the decedents or the spouse, therefore the life insurance would not be considered a part of the estate for tax purposes.
How the Irrevocable Life Insurance Trust works
The (insured) often called the turstor or grantor, names a trustee, (family member, friend, etc.) who will purchase the policy or trust and will list the trust as the owner, and usually the beneficiary. After the insured’s death (grantor, or trustor) the proceeds of the insurance are paid to the life insurance trust. Then the proceeds are distributed to the beneficiaries of the trust, often the children, foundations, etc. If done correctly the life insurance will be issued free of federal estate taxes. However, Irrecoverable Life Insurance Trusts may not be for everyone. Remember the key word is they are irrevocable, meaning you cannot change their terms. To set up a trust and or see if you are subject to estate or inheritance taxes you should consult with an attorney and or accountant who specializes in trusts and estate planning.
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Disclaimer: This information is for information purposes only. This information does not constitute financial, tax or legal advice. Please contact your financial or legal adviser regarding your specific needs and situation.