The Federal estate tax is something to be aware of when you are planning ahead for the inevitable. There is an exemption, but once you exceed it you are looking at an extraordinary rate of taxation.
As of this writing the exclusion is $5.12 million and the maximum rate is 35%. Next year the rate goes up to 55% while the exclusion goes down to $1 million.
You have to make sure you include all of your assets when you are evaluating your potential exposure. With this in mind you would do well to understand the fact that life insurance proceeds are part of your taxable estate if you own them personally.
One solution would be to create an irrevocable life insurance trust and have the trust buy the policies and if you already own policies you can place them into the trust in an effort to remove the proceeds from the value of your estate.
However, there is a three-year rule to take into account. If you pass away within three years of placing the policies into the trust the proceeds will in fact be looked upon as part of your estate by the Internal Revenue Service.
The ILIT can be a very useful tool for people who are looking for tax efficiency. If you would like to learn more about these trusts and other possibilities, simply take a moment to arrange for a consultation with a good Hartford estate planning lawyer. Your attorney will examine your situation, gain an understanding of your wishes, and provide you with the appropriate advice.