When you are planning your estate, you should create a statement of net worth to inventory your assets. This is simply a balance sheet. You enter your assets and liabilities, and you determine exactly what you have to give to your loved ones, and you gain an understanding of your debt. This is important for multiple different reasons.
Estate tax exposure is one important thing to take into consideration when you are evaluating the extent of your assets. The federal estate tax can heavily impact your legacy, given the fact that it carries a 40 percent maximum rate.
The estate tax is a factor for people who have been very successful from a financial standpoint, but most people do not pay the tax. There is a federal estate tax credit or exclusion. This is the amount that you could transfer to people other than your spouse tax-free. In 2015, the amount of this credit is $5.43 million.
Life Insurance Proceeds
If you have insurance policies on your life, and they are in your personal possession, the proceeds would be part of your estate for estate tax purposes. You should certainly keep this in mind when you are taking stock of your potential estate tax exposure.
There is a step that you can take to remove the policies from your taxable estate if you have concerns. There is a legal structure called an irrevocable life insurance trust. You could convey the policies into this type of trust, and as long as you live for at least three years after taking this action, the value of the policies would not be counted as part of your taxable estate by the Internal Revenue Service.
It would be possible to have the trust itself purchase insurance policies on your life. If this strategy was to be implemented, the three-year rule would not apply, because you never actually owned the policies personally.
When you are choosing a beneficiary for an irrevocable life insurance trust, you may assume that you should name your spouse. However, if you go this route, your spouse would hold the proceeds after your passing. They would be part of his or her taxable estate.
To avoid this, you could make the trust itself the beneficiary of the insurance policies. Your spouse could benefit, but he or she would never take direct personal possession of the entirety of the proceeds, and this would have positive estate tax implications.
Learn More About Life Insurance Trusts
If you would like to obtain more detailed information about life insurance trusts, download our special report on the subject.
Mr. Horowitz was awarded his Juris Doctor degree with honors from the University of Connecticut School of Law. While attending law school, Mr. Horowitz received the American Jurisprudence Award in Legal Ethics and the Nathan Burkan Award.
After graduation from law school, Mr. Horowitz continued his legal education at New York University School of Law where he received a Post Doctorate Law Degree in Taxation. He has also recently received a national achievement award.
Mr. Horowitz is admitted to practice before all the state courts in the State of Connecticut and the United States District Court.
Mr. Horowitz was selected for Super Lawyers in 2021.
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