Do Not Make This Major Estate Planning Mistake
Most people know that the proceeds of a life insurance policy are generally free of income taxes. What many do not realize, however, is that life insurance proceeds are included in their estate for estate tax purposes.
Currently the federal estate tax exemption is $5,000,000. However, that threshold expires after 2012, putting the estate tax, once again, in limbo. It is possible the exemption will be reduced. If that occurs many families who do not think of themselves as rich will have a significant potential estate tax issue.
However, there are ways to address that issue. By creating an Irrevocable Life Insurance Trust (ILIT) and transferring the ownership of a life insurance policy to the trust, estate tax at the death of the insured (and the beneficiaries) can be avoided. For a transferred policy, the insured must survive by three years for the proceeds to escape taxation, but a newly issued policy in the name of the trust is normally exempt, immediately.
Many clients are reluctant to set up an ILIT because of the cost. But the cost is not much compared to the thousands of dollars the ILIT can save. People don't think twice about spending $500 a year to insure a $20,000 car, but will not justify expense to save a significant estate tax bill for the benefit of their family. They should rethink that position.
In some cases, to not create an ILIT may be estate planning's costliest mistake. An ILIT is quickly and easily implemented by an experienced estate planning attorney. It will not limit or complicate the ownership of your assets, and it is a veritable bargain in comparison the benefit it will provide.
ABOUT THE AUTHOR: Richars Schneider
Experienced estate planning attorneys of the Law Offices of Richard B. Schneider LLC offer estate planning and business planning resources to residents of Portland OR.
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Disclaimer: While every effort has been made to ensure the accuracy of this publication, it is not intended to provide legal advice as individual situations will differ and should be discussed with an expert and/or lawyer. For specific technical or legal advice on the information provided and related topics, please contact the author.