If you are in possession of a considerable store of wealth, you should be well aware of the potential impact of the federal estate tax. Here in Indiana we do not have a state-level estate tax to contend with, but the federal death tax looms large for high net worth families.
Asset transfers to your spouse (assuming your spouse is an American citizen) are not taxable under any circumstances, but transfers to anyone else, even your children, are potentially subject to taxation. The first $5.43 million that you transfer can change hands free of taxation, because there is a $5.43 million credit or exclusion. Any portion of your estate that exceeds this amount can be taxed.
We should point out the fact that there is also a gift tax in place, and it is unified with the estate tax. This tax exists to stop you from giving gifts so that you can avoid the estate tax. The $5.43 million exclusion is a unified gift and estate tax exclusion.
Life Insurance Policies
When you are evaluating your level of estate tax exposure, you have to count everything that you own. This would include any life insurance policies that you may have. The proceeds from the policies would be part of your estate for estate tax purposes.
If you are concerned about the tax consequences of your insurance policies, you could consider creating an irrevocable life insurance trust. Since the trust is not revocable, you are surrendering incidents of ownership when you convey the policies into the trust. As a result, they are no longer part of your taxable estate.
However, there is a three-year rule with regard to transferring policies into an irrevocable life insurance trust. You have to live for at least three years after conveying the policies into the trust if you want to gain estate tax efficiency. The policies would go back into your estate for tax purposes if you pass away within this three-year window.
Learn More About Irrevocable Life Insurance Trusts
We have provided some very basic information about the estate tax and the value of irrevocable life insurance trusts in this brief blog post. If you would like to obtain more detailed information on the subject, download our special report.
This in-depth report will provide you with a sound foundation of very useful information about irrevocable life insurance trusts. The report is free, and you can click this link to obtain access your copy: Free ILIT Report.
Take the Step
The federal estate tax can significantly impact the financial legacy that you will be leaving behind to your loved ones. If you would like to discuss taxation or any other estate planning matter with a licensed professional, our firm can help.
We offer no obligation consultations, and you can contact us through this page to set up an appointment: Indianapolis IN Estate Planning Attorneys.
Mr. Kraft assists clients primarily in the areas of estate planning and administration, Medicaid planning, federal and state taxation, real estate and corporate law, bringing the added perspective of an accounting background to his work.