Despite Scheduled Repeal, Death Levy Could Surprise in 2011

Under current law, the first $2 million of an estate is exempt from the federal estate tax in 2008. The exemption rises to $3.5 million in 2009. These amounts are probably generous enough for most families to avoid the estate tax altogether until 2010, the one year in which the tax is scheduled to be eliminated.

But unless Congress changes the law, the estate tax will be back in 2011 with a $1 million exemption amount. This means that families who never expected to be liable for the estate tax may suddenly find the opposite is true.

Take Two
If you would like to see your heirs inherit your legacy without the burden of estate taxes, life insurance might help. Life insurance proceeds can be used to help pay estate taxes so your heirs don’t have to sell inherited assets, such as a house or a business, to raise money. However, conventional life insurance may be too expensive or difficult for some people to obtain, depending on variables such as age, health, and lifestyle.

In such cases, survivorship life insurance might be the answer. A second-to-die policy is generally less expensive because it insures the lives of two people and pays a benefit only after both have died. The risk of two people dying in a given period is lower, so the risk that the insurer will have to pay a benefit in the same period is also lower.

If the estate tax situation eventually becomes more favorable, a survivorship benefit can still be a good way to pay final expenses and probate costs, provide income to survivors, or fund a charitable donation. Purchasing the policy in an irrevocable life insurance trust helps keep the proceeds out of the taxable estate, allowing the benefit to pass to beneficiaries free of federal estate taxes.

Business owners may also find survivorship policies useful for insuring key persons or funding buy-sell agreements.

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. The use of trusts involves complex tax rules and regulations, so it’s wise to consider the counsel of an experienced estate planning professional before implementing such strategies.

Because it’s unclear what will happen to the federal estate tax, it is a good idea to be prepared for any outcome. Survivorship life insurance may help you prepare at a more affordable cost than conventional life insurance.

This material was written and prepared by Emerald Publications.
© 2008 Emerald Publications