With the turmoil caused by the repeal of the Federal estate tax in 2010, and the return of the tax in 2011, now is the time to address paying estate taxes within your estate plan. Currently, on January 1, 2011, the Federal estate tax is set to return with a vengeance, as the Federal threshold is slated to be just $1 million with a tax rate up to 55%. With the value of a home, along with stocks, bonds and retirement accounts included within an estate, the $1 million threshold may be closer than you realize.
While estate planning can reduce the tax burden of an estate, plans should also be made to pay any anticipated estate taxes. If an estate is lacking liquidity to pay estate taxes, property may need to be sold to meet this obligation. This is particularly the case for estates that hold real estate, farms or a small business.
One method to address estate taxes is to purchase a life insurance policy to provide enough cash to pay the estate taxes, as well as any additional expenses, such as funeral costs and probate fees. One such type of life insurance may be used by married couples to address this issue, it’s called survivorship life insurance or last-to-die insurance. It’s often used to provide the cash needed for the estate taxes and expenses which will ultimately be due when the second spouse passes away, since when the first spouse passes, the estate can pass to the surviving spouse with no estate taxes.
Survivorship life insurance insures the lives of both spouses and pays upon the death of the second spouse. Premiums may be slightly less than a typical life insurance policy, as the insurance company does not pay until both spouses are deceased.
Estate planning needs to not only address the potential tax burden of an estate, but provide for enough liquidity to cover the expenses incurred in the estate administration. After all, one goal of estate planning is to ease the burden of your passing on your loved ones, and providing for the estate taxes and expenses will accomplish just that.
- How Estate Planning for a Family May Trap the Unwary Practitioner - August 31, 2022
- State Income Taxation of Social Security Benefits - August 24, 2022
- Understanding Tax Apportionment Clauses - August 17, 2022