Since the federal estate tax was established in 1916, the amount exempted from the tax has been raised substantially over time. The $5 million exemption for 2011 and 2012 is the highest in history, and the 35% top estate tax rate is the lowest in 70 years.1
However, these generous provisions may
not last. After 2012, the federal estate tax is currently scheduled to revert
to a $1 million exemption and a 55% top tax rate. Many families with a home and
large retirement accounts in Charleston SC, Miami FL, Charlotte NC and Atlanta GA could easily have estates worth $1 million or more. A survivorship life insurance policy
is one way to help heirs pay estate taxes, probate costs, and other final
expenses.
Preserving
a Legacy
Also called second-to-die insurance, a
survivorship life insurance policy insures two people and pays a benefit after
the death of the second person. The premiums are usually less expensive than
premiums for a single life insurance policy, because they are based on the life
expectancies of both insured individuals.
The unlimited marital deduction allows
assets to pass to a surviving spouse free of federal estate taxes, so estate
taxes typically do not become an issue until estate assets pass to nonspouse
heirs. Thus, a survivorship life insurance policy could pay a benefit at the
time it may be needed most.
Moreover, by purchasing the survivorship
policy in an irrevocable life insurance trust, the proceeds may not be
considered part of your taxable estate. The use of trusts involves a complex
web of tax rules and regulations. You should consider the counsel of an
experienced estate planning professional and your legal and tax advisors before
implementing such strategies.
Even if you are not concerned about the
estate tax, a survivorship life policy could be a relatively inexpensive way to
leave a legacy, especially considering that an individual life insurance policy
may be more expensive or difficult to obtain later in life. Survivorship life
might also be used to insure business partners.
The cost and availability of life
insurance depend on factors such as age, health, and the type and amount of
insurance purchased. Before implementing a strategy involving life insurance,
it would be prudent to make sure that you are insurable. As with most financial
decisions, there are expenses associated with the purchase of life insurance.
Policies commonly have mortality and expense charges. In addition, if a policy
is surrendered prematurely, there may be surrender charges and income tax
implications.
With the uncertain future of the estate
tax, now may be a good time to consider a survivorship life insurance policy.
Even if the estate tax doesn’t apply to your estate, the insurance proceeds
could benefit your heirs or a favorite charity.
1)
Internal Revenue Service
The
information in this article is not intended as tax or legal advice, and it may
not be relied on for the purpose of avoiding any federal tax penalties. You are
encouraged to seek tax or legal advice from an independent professional advisor. The content is derived from sources believed to be accurate. Neither
the information presented nor any opinion expressed constitutes a solicitation
for the purchase or sale of any security. This material was written and
prepared by Emerald. © 2012 Emerald Connect, Inc.
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Typically, you can obtain $1 million in coverage for a few hundred dollars a year. However, you must usually purchase the maximum liability coverage on your homeowners and automobile policies; they serve as a deductible for the umbrella policy, which can provide additional coverage (up to the policy limits). Umbrella policies may also cover situations that are not included in standard policies, such as libel, slander, invasion of privacy, defamation of character, and other personal injuries.
Mandatory distributions. Unlike the case with traditional IRAs, there are no required minimum distributions (RMDs) at age 70½ for original Roth IRA owners, so you can keep money in your account until you need it, or bequeath it to your heirs if you wish (IRA beneficiaries must take RMDs). The longer your investments can pursue growth, the more advantageous it might be for you and your beneficiaries to have tax-free withdrawals.
