estate taxes life insurance

Estate Tax Recovery

Checking your exposure to estate taxes

At a minimum, estate tax and inheritance taxes can be imposed at the federal and state level, given this, individuals should check with their CPA and/or a tax attorney, regarding the potential for exposure to either of these taxes, now and what the potential may be in the future.

Most people don’t believe they have or will have assets significant enough when they die to make death taxes matter,  but most likely, your heirs and estate will be faced with some tax burden.  Also –  tax laws and rates can change over time.  

And when you’re trying to predict what will happen 20, 30 or 40 years from now — nobody knows, and only a fool would try to guess! 

A device commonly known as an ILIT (irrevocable life insurance trust) is typically used to segregate the life insurance death benefit proceeds from the insured’s estate, for the purpose of having those funds excluded from the taxable estate, and in the case of the estate incurring any tax, using those funds to pay the estate, thereby keeping the estate “intact.”

Keeping the estate “intact” is extremely important if a non-liquid asset is part, or all of the estate, the decedent may wish to pass real estate or a business that has value that subjects the inheritors to taxation, but the estate, or inheritors, don’t have cash to pay the estate or inheritance tax due. This might cause the need to quickly liquidate the asset for a fraction of its value, since the due date on the taxes owed may force a below-market sale of the asset(s).

Using permanent life insurance to manage estate tax funding

Estate tax funding issues are generally only properly addressed with permanent life insurance, and a proper plan from an experienced professional is necessary to design a coverage plan that will most likely fulfill the requirement in the distant future. There are several major considerations when doing insurance policy design for this type of estate planning, some of them are, retention limits of the carrier you and your agent choose, general account rating, booked obligations, earnings history, dividend history, trend of the assets and liabilities.

Your independent agent should be able to produce and review a VitalSignsⓇ comparison of the carriers he or she is recommending to you. In the hands of an experienced agent, the reports on the various carriers can help guide your decision to a company you think is most suitable for your goals, and alleviate future regret about the company you chose.

So if you are now, or think you may be in a position in the future, where you want to make sure you have done some planning around alleviating an estate of inheritance tax burden from your heirs, it would be prudent by engaging an experienced life insurance professional, as well as an estate attorney and/or CPA, who can take you through the first steps of developing a strategy