Posts filed under 'estate taxes'
Where the heck did my net worth go? This has been one tough month on those of us who are actually middle class enough to care what happens to our retirement investments. For many it is a scramble to get your money to a safe place, with people scrambling to move money to T bills even as their investment counselors recommend riding it out.
I know for my wife and I it is a day to day bit of tension watching as the CEO’s, even temp CEO’s, on Wall St make monster salaries, and the bozo in chief lame duck keeps giving 5 minute speeches, it is a bit hard to rap our minds around the idea that we can ride it out and the whole thing will just be a distant memory in a few years and all will be OK.
The thing that I hang my confidence on that can see us through to better times is the life insurance I have in force, a thought that many may want to consider. It’s not that I don’t believe the markets and economy won’t come back, but rather the what happens if I die before it does and leave my wife with nothing but a badly mangled investment portfolio. For me that question is answered.
Life insurance has always been an effective estate preservation tool, usually looked at in the context of estate taxes, but I have to tell you that in the absence of portfolio value, hardly a beat will be missed if there is adequate life insurance in place. Your spouse and your family will be fine if you have planned for good and bad times.
Bottom line. Insurance is all about taking the risk out of the unknown. The peace of mind that your spouse will have in knowing that all of your work won’t be blown by Wall St and the Treasury secretary is worth the small cost of some additional term insurance.
October 2nd, 2008
If the proposed changes in the estate tax laws are adopted by congress, and it looks like they will be, the exemption limits will finally be sufficiently high enough to protect the majority of John McCain’s middle class from having the pants taxed off of their estates.
If all goes well, in 2009 the individual estate tax exemption will be raised to $3.5 million, up from just $600,000 8 years ago. This means that a married couple can effectively exempt the first $7 million of their estate from the proposed 45% tax.
If you try to go it alone in estate planning and purchase life insurance to cover taxes that may come due upon your death or the death of you and your spouse, you may make a simple error that will result in creating a larger tax liability rather than providing the funds to dispose of the liability that exists. The mistake is the ownership of the life insurance.
If an estate isn’t in a taxable situation and isn’t likely to be, there isn’t anything wrong with being the owner of your own life insurance policy. In fact it makes sense in most cases. But, if you own your own policy, while the proceeds are not taxable as income to your beneficiaries, the amount of the death benefit is added to your estate. So, if you had an estate worth $5 million and you owned a life insurance policy on yourself for $5 million, upon your death your estate would have a value of $10 million. Instead of $1.5 million being taxable after the exemption, there would be $6.5 million taxable at a rate of 45%.
The key is ownership and when you’re dealing with estate value and taxation the most prudent route to take is setting up an irrevocable life insurance trust that owns and is the beneficiary of the policy. This keeps the proceeds from being added to the worth of the estate and lowers the tax burden, allowing all of the life insurance to pass freely to the task of paying estate taxes.
So, if you own your own policy, can you just set up a trust and do an ownership change? Well, the answer is yes, sort of. The IRS has a 3 year look back rule when it comes to life insurance ownership and if the ownership has changed in the 3 years just previous to a person’s death, they will rule that the original ownership stands. While most of us can suck it up and say we’ll just outlive that 3 year rule, if there is anything substantial on the line, it may be prudent to buy a short term insurance policy owned by the trust that can cover the three year rule as it runs its’ course.
Bottom line. Good estate planning and guidance is worth the expense. Just one word of caution. Pass on to your estate planner or attorney that you’ve heard that people occasionally die prematurely so it would be best if they could make a recommendation on what life insurance to purchase and how without making a career out of it.
September 2nd, 2008
Historically life insurance used in estate planning has revolved around the issue of estate taxes, with the irrevocable life insurance trust being the stop gap to keep the government from draining off half the value in fairly liquid estates and sometimes completely gutting estates with very low liquidity.
With the downturn in the economy over the past year, the value of many estates that were borderline taxable has fallen to the point where some are considering whether estate protection is needed. Another thing that has pushed on that already leaning tree is the fact that congress appears to be seriously poised to lock in the estate tax exemption at next year’s already legislated level of $3.5 million.
Before you bag that life insurance there may be a few things you want to consider. First of course is the fact that economic downturns historically don’t last and value lost will likely be regained. And, while the new exemption limits may seem temptingly high enough to consider foregoing protection, a turn around in real estate and investments, coupled with a few right choices can put your estate right back in the governments hip pocket.
Another thing to consider for those estates that were borderline taxable at the lower exemption limits and seem safely padded if the exemption goes to $3.5 million, is the idea of keeping that irrevocable life insurance trust in place as a wealth preservation tool. It could be that extra million or two that makes your estate “economy proof” should you happen to suffer more losses or die during an economic slowdown.
Bottom line. That in force life insurance has value to your estate in several ways and they should all be considered before any firm decision is made to lapse something that may have huge value down the road.
August 18th, 2008
According to the aficionados, the only thing better than a garage sale is an estate sale. In the best of situations this is after all the good stuff has gone to family members and the executor of the estate throws the rest of it in the front yard so their job can finally be done.
Many times though, this is a serious attempt to raise money to pay the expenses of the estate, whether that is debt, state death tax or federal estate taxes. This is when families see all that a loved one has worked all their life to accumulate go to strangers for pennies on the dollar. This is what happens when there is no estate planning.
While we generally think of the wealthy as those who use life insurance for estate planning, the truth is that a lack of life insurance can cause an equally devastating event with the less well to do when a person dies with debt that needs to be paid or with a mortgage on their most valuable asset. Unless someone’s estate plan is to leave a mess and not worry about it, a visit with an independent life insurance agent is a prudent idea. Even if the outcome isn’t perfect (and most estate plans aren’t), the truth is that having some life insurance in force is far better than having nothing.
You don’t need to worry about buying life insurance to add value to your estate, but do your loved ones a favor and have at least enough that they still have fond memories of you once the mess you’ve left behind is sorted out and cleaned up.
For those with larger estates, let’s just get practical. Your estate can go to your family if you plan properly, or you can give half to them and half to the government if you don’t.
Bottom line. There are those who honestly don’t care what kind of mess is left behind. For them, while not a nice thing to do, doing nothing is probably an adequate plan. For the rest of us, it’s time to take this part of life seriously, not for us, but for those we leave behind.
June 23rd, 2008
The not so funny standing joke in the estate planning business is that the most lucrative plan would be a plan to die in 2010.
The meat behind that joke is, of course, the estate tax revision law that was was passed not long after Bush took office that started reform of estate tax laws in the right direction but had a twist in 2010 that made no sense then and far less sense now. The idea was to raise the limit of the exemption over the years so that increasingly larger portions of estates would not be taxable. Back when the law was passed the exemption was a piddly $600,000. Everything over that estate value was taxable at exorbitant rates.
Over the years it has been raised to the current 2008 level of $2,000,000 and in 2009 it is due to be raised to $3,500,000. The twist and the reason that 2010 would be a “good time to die”, is that unless congress does something to change the law currently on the books, the estate tax would disappear completely for one year. No exemption needed because there wouldn’t be a tax.
Then the next stupid twist in store for those who have truly been trying to plan for and protect their estates would happen in 2011 when the exemption would return to the 2001 level of $600,000. This has been a nightmare for accountants, attorneys and anyone who has been trying to protect their estate with survivorship or second to die life insurance. This has been an especially expensive shell game since most survivorship policies are funded with universal life or whole life policies. The target keeps moving.
Most of those willing to bet on this are saying that they believe congress will vote to extend the 2009 exemption through 2010 to give them time to come up with a permanent plan. The law has gone a long way in the right direction and no one can afford to have it disappear and no one can fathom it returning to 2001 levels.
Bottom line. Starting with the 2009 exemption level of $3,500,000, expect for congress to find some way to periodically increase it. In 2001 $600,000 wasn’t fair and I think it is fair to assume that in 2020, $3,500,000 won’t be fair.
June 2nd, 2008
Estate tax repeal, just like getting older, is gently creeping up on us at about the speed of a Lear Jet. In 2010, if congress doesn’t do anything the estate tax will disappear until, of course, reinstated by a congress and president of sound mind. Most of those with taxable size estates are still taking the prudent route of insuring the interest of whatever family business or fortune they have been blessed with.
There are a couple of reasons that I believe are valid to consider in favor of overturning the federal estate tax repeal, but first let’s talk about why it’s prudent to act as if it will never happen.
Probably the most compelling argument for not pulling the plug on estate tax protection, such as second to die universal life insurance, or not moving ahead with estate tax protection is that, in all likelihood it repeal will never happen. Change may occur but I am hard pressed to find anyone that believes it will be repealed. Under current law, in 2009 the estate tax exemption will raise from $2,000,000 this year to $3,500,000. Remember, this is up from the overbearing exemption of the year 2000 of just $600,000. We’ve come a long way. This has paved the way for especially small business owners to be able to pass on the fruit of their life long labor to their family without the government taking a giant bite out of that piece of fruit. So, reason number one, I just don’t see it actually happening.
Reason number two not to abandon estate planning is that if, for someone unfathomable reason, the federal government does allow estate tax to lapse to nothing, fully expect individual states to fill that void just as surely as one wave follows another on the beach. Many states, such as Washington with their 17% “death tax” have already jumped the gun in anticipation.
So, it likely won’t happen. Here’s a couple of practical reasons why it shouldn’t happen. Anyone that has been paying attention at all to the national debt and deficit knows that this past 8 years has been a bit like handing a teenager (the government) a limitless credit card with no guidance and expecting a good outcome. Repealing estate taxes would be a huge revenue hit at a time when they can ill afford it.
The other impact of estate tax repeal would be a drought in charitable giving that is so huge that it would seem almost un-American in its’ magnitude. Currently an overweight estate can be purged through charitable giving to avoid taxation. A good thing for the family and the charity. If there is no tax, there is no incentive to give prolifically. Now I know this crushes the idea that all charitable giving is heart driven. Well, it’s not really crushed. I happen to think it is a noble and heartfelt thing when a family or person happens to choose a charity over the federal government.
Bottom line. Rather than a time to give up on estate tax protection and sack any efforts at new planning, today is a time when well thought out estate planning is as important, if not more important, than at any time in our past. In another post I will cover current proposed estate tax bills floating around congress. It doesn’t appear as though anyone is waiting for 2010 to deal with the poorly thought out repeal issue.
May 27th, 2008
However the elections shake out, congress and the new president will be dealing with the estate tax issue over the next year. Already a myriad of options have been thrown into the hopper. Amost no one and none of the proposals point to the elimination of the federal estate tax.
The good news in all of this as I have discussed in previous posts is that in the past 10 years the law will have evolved from the estate battering $600,000 exemption that ruined the life’s work of so many hard working people. Where that evolution ends remains to be seen, but there is little doubt that it will be a far fairer treatment than where we started.
Here is a list of the current ideas floating about DC.
- HR 1929 and S 1994 introduced by the Salazar brothers of Colorado would exclude farms from estate taxes as long as the farms remain farms. This is my home state and personally I think these two need to recognize that only about 1% of those impacted by estate taxes are farmers and ranchers. Unfortunately for the rest of us they both wear cowboy hats and they can’t seem to see beyond that.
- HR 3170 comes from democrat Harry Mitchell of Arizona. It would raise the combined exclusion to $5mm from the 2009 limit of $3,5mm over a six year period.
- HR 3475 from democrat Michael Capuano of Massachusetts would increase the exclusion to $5mm in 2010. No phase in period.
- HR 4235 from democrat Nita Lowey of New York would change the exemption to $3mm immediately, bypassing the increasing to $3.5mm in 2009.
- HR 4042 from democrat Gerald McNerney of California would increase the exemption a year early to $3.5mm and establishes 45% as the maximum estate tax rate.
- HR 4172 from democrat Dennis Moore of Kansas again increases the exemption to $3.5mm a year early and indexes the exemption amount for inflation after that.
- HR 4242 from democrat Earl Pomeroy of North Dakota make the exemption $3mm for 2007 and 2008, $3.5mm for 2009 and beyond. It freezes the maximum tax at 47% for taxable amounts in excess of $2mm.
It seems to me there are a lot of very good options being considered. Obviously none of it will happen before the elections, but, with the exception of my two cowboy legislators from Colorado, all of the proposals are huge improvements over where we were 10 years ago. My personal opinion is that indexing for inflation will fix the problem for the future.
Will there still be a need for survivorship or second to die life insurance? I think it will still play a pivotal role, but most of these proposals would eliminate smaller estates from needing that kindof protection.
Bottom line. 2009 will be an interesting year. I personally am very optimistic and hopeful about the changes in estate tax law and I think the direction of the country in general.
March 8th, 2008
There are a couple of reasons this upcoming election could have an impact in the life insurance realm. For most of us poor folks you would think that estate taxes wouldn’t be a big issue. I think it’s significant no matter who you are.
Just to recap the journey that estate tax law has been on, back in 2000 estate taxes had to be paid on any estate over $600,000. The $600,000 is called an exemption meaning that much of your estate is exempt from taxes and can be passed to your heirs tax free. What was happening was that people were working all of their lives to build up businesses like ranches and farms, and the more successful they were, the more the federal government got when they died.
Because there is also a rule that says the taxes have to be paid within nine months, this often creates a fire sale situation where full value is not realized. It was not unusual to see businesses worth $2-$3 million be sold for pennies on the dollar to meet the tax obligation, leaving the family with nothing.
So, the exemption has been increasing since then and is now at $2,000,000. Next year it will go to $3,500,000. Theoretically in 2010 it will disappear altogether and there won’t be any estate tax and at the end of 2010 it will reappear with a $1,000,000 exemption. Confused yet?
The idea of raising the exemption to next year’s $3.5 million is a home run for hard working families and family owned businesses. Congress has a choice about everything that happens in 2010, and depending on who is in charge I, and many of my colleagues think it will shake out one of two ways. Either the Democrats will be in charge and they will choose to freeze the exemption at $3.5 million, or the Republicans will be in charge and they will let it go away.
Without getting political, if it is frozen at $3.5 million, a home run has been hit over the past 10 years for those who have been successful. If the exemption goes completely away the government will have done away with an historic funding source that has finally been made fair. That funding source will then be distributed over a broader number of people and the poor folks will get to help carry that burden.
The other thing has to do with health care and health insurance. In an article I read today it cited a study that showed that people without health insurance were more likely to have cancer diagnosed later, often too late. Because they can’t afford what some people can afford, they don’t get to live as long and their families can be destroyed over inordinately high medical costs.
Bottom line. Plenty of life insurance reasons to think about the upcoming election.
February 18th, 2008
A recent senate finance committee meeting was convened to hear both sides of the argument on the 2010 repeal of estate taxes. As I have pointed out in previous posts, the estate tax has been modified over the past 7 years to make it less of a burden on medium sized estates.
In 2009, the size of the estate exempt from estate taxes will have grown from a pathetic $600,000 in 2000 to $3.5 million. To put that in perspective, in 2000, a $3.5 million estate would have owed nearly $1.5 million in estate taxes. In 2009 it would not be taxable.
The next step comes in 2010. That is the year, if the current legislation is left in place that the estate tax will go away completely at the federal level. You would think that the idea of no estate taxes would have the wealthiest individuals drooling, but just the opposite has happened.
Speaking at this particular hearing was Warren Buffett, one of the wealthiest men in America. Even though his estate would be taxed billions of dollars, he thinks it should be left in place. One of his primary arguments had to do with how the government was going to replace nearly $24 billion in lost annual revenue.
One of the strongest arguments against the estate tax, and the primary reason that the exemption has been brought to a more realistic level is the portion of the estate tax law that makes the taxes due within 9 months of the death. Settling an estate of any size in 9 months is nearly impossible if everything goes right. If there are significant taxes due, the estate not only has to be settled, but there may have to be substantial liquidation in order to meet the tax burden. It is this fire sale mentality that causes the demise of many ranches and businesses. Hopefully one of the changes that will come out of the fray is a longer period for estate tax settlement.
Bottom line. We probably won’t have a good feel for how this will all shake out, until it shakes out in 2010. Until then, life insurance for estate preservation is the most viable tool out there to protect what you’ve worked all your life to build.
November 26th, 2007
Currently the federal estate tax exemption, the amount of an estate that can pass on to a family without being taxed (at the federal level), is $2,000,000. This is up from an estate gobbling $600,000 just 7 years ago.
Remember that a persons entire estate can pass tax free to their spouse, no matter how large it is. Estate taxes come due upon the death of the second spouse. This is the point at which many families see much of what their parents have accumulated gobbled up by the government, in many cases trashing a lifetime’s worth of work.
In 2009 the estate tax exemption will increase to $3,500,000 and in theory, if the congress doesn’t do anything to change the course of events, the federal estate tax will be gone in 2010. Two scenarios will play out at that point.
First, if the federal goverment actually lets the estate tax disappear, state governments stand poised to fill that void by increasing their state death tax limits. Many states have been raising their taxes as the exemption has been increasing at the federal level. The states can already see the dollar signs. So, while the payee will have changed, the drain on estates will likely continue.
The other direction this could take, the more likely direction in my mind, is that congress will vote to leave the $3.5 million exemption in place, having accomplished what needed to be done, giving tremendous relief to mid sized estates.
Bottom line. Estate taxes, whether federal or state, will likely continue beyond the drop dead date of 2010. One of the most efficient and cost effective ways to leverage the pay off of those taxes is through a second to die life insurance policy owned by an irrevocable life insurance trust. Whether your estate is over the taxable limit, of headed for it, you should be looking at this tool.
November 26th, 2007
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