Survivorship Life Insurance and Estate Taxes

The Estate Tax and Survivorship Life Insurance Work Together

Protect Your Wealth From The IRS using Life Insurance

Without proper planning, a chunk of your money could go to the IRS at your death in the form of an estate tax. Most people cringe at the thought of working for a lifetime to build a legacy, but have it taken away by the federal death tax. While estate taxes may be inevitable, there are ways to conserve — or at least replace — a portion of your estate. One effective tool to help protect your net worth is a survivorship life insurance policy.

Will you have an estate tax problem at your death?

Our relentlessly booming economy has created unprecedented wealth — and a number of people with sizable estates. In 1975, for example, 350,000 households boasted net worth in excess of $1 million. Today, that once-exclusive Millionaires Club numbers more than 3.5 million. Moreover, if the economy keeps clicking along at its present pace, that figure should hit 5.6 million households by 2005.
The majority of millionaires aren’t limo-riding celebrities.

Estate Tax Basics

Under today’s tax laws, here are several factors you should keep in mind:

• Estate Taxes have scaled down under the Bush Administration, and are currently set to expire in 2011. However, I would imagine that there is about a 0% probability that the Obama administration will keep this in place. Your estate exemption will likely go back to the previous levels of $1.5-2.0 million levels.
• If your estate exceeds that amount, estate taxes may be due. The bigger your estate, the bigger the estate tax bite. At the top level, estate taxes could run as high as 55%.
• You can transfer your entire estate to your spouse at your death with no tax liability at that time, if exclusion is not met, and provided your spouse is a U.S. citizen.
• If you do this, the estate may be subject to estate tax at your spouse’s death. Your heirs may get hit with a estate tax bill.

The results can be devastating. Imagine a family business worth several million dollars. Mom and Dad built it from scratch. While the company is still in their name, the children now run it and will eventually inherit it. However, after Mom and Dad die, the children suddenly face an estate tax bill of potentially up to a million dollars or more. They may very likely have to sell all or a portion of the business just to pay the taxes. These estate transfer taxes are one reason 70% of family-owned businesses fail to make it to the second generation

Survivorship Life Insurance: one effective strategy

If your estate exceeds the exclusion amount, you may have an estate tax liability. However, that does not mean your heirs should lose part of your estate.
This is where Survivorship Life Insurance enters the picture. Also known as second-to-die insurance, this coverage can insure both you and your spouse under one policy, with the proceeds payable after the second death.

Survivorship Life Insurance offers a number of benefits as an estate planning tool:

• Simplicity. Under one arrangement, you may want to establish an irrevocable life insurance trust to purchase the insurance policy, with your heirs as beneficiaries. (This keeps the insurance proceeds out of your estate for tax purposes.) By means of a will, estate assets then pass to the surviving spouse at the first death. At the second death, the insurance death benefit is paid, with the policy proceeds passing directly to the named beneficiaries. They can then use the money to replace assets lost to taxes.

• Price. Since two lives are insured, premiums are generally lower than for two single-life policies.
• No second guessing. There is no need to plan based on who will die first.
• Underwriting is generally more liberal than that for a single life policy, since two lives are insured and the benefit is paid at the death of the second. A proposed insured who may have been denied life insurance coverage by a single life insurance product, may be approved for coverage by a survivorship life insurance product. Keep in mind that not every person who has been declined for coverage for a single-life policy is necessarily eligible for coverage under a survivorship life insurance policy.

Survivorship Life Insurance can meet other needs as well, and is commonly used to benefit:

• Children with special needs. The insurance can provide guaranteed funding for a trust to provide for a child with disabilities after the death of the second parent.
• Charitable gifts. This coverage can help create a living legacy for a favorite charitable organization after both spouses’ needs have been provided for.

You work hard to build up an estate over your lifetime — and you may end up a millionaire. While taxes may be inevitable, you can help counter the loss with a Survivorship Life Insurance policy.

Tags: Death Tax, estate planning, estate planning and trusts, Estate Tax, federal estate tax, Life Insurance, Obama Estate Tax, SUL, Survivorship Life Insurance

This entry was posted on Saturday, November 29th, 2008 at 1:16 pm by admin and is filed under Estate Tax. You can follow any responses to this entry through the RSS 2.0 feed. Both comments and pings are currently closed.