Tips for Surviving the Estate Tax

Although the federal estate tax is back after a one-year reprieve, the effect on Americans could be somewhat modest compared to what may be coming.

The federal estate tax was reinstated retroactively to January 1, 2010, by the 2010 Tax Relief Act. The good news is that the exemption amount has risen to $5 million, which excludes the majority of American households from being subject to the 35% estate tax. And because of the law’s “portability” provision, married couples may be able to shield up to $10 million from federal estate taxes.

The not-so-good news is that these tax-law provisions are scheduled to expire on December 31, 2012. Unless lawmakers extend or amend the law, the federal estate tax will roar back in 2013 with a reduced $1 million exemption amount and a 55% top tax rate. These days, individuals who own a home and large retirement accounts could easily leave behind more than $1 million.

If you are concerned about the future of estate taxes and want to leave your heirs a legacy and/or liquid assets to help cover any estate liabilities, you might consider survivorship life insurance.

How Survivors Can Benefit

A survivorship life insurance policy (second-to-die insurance) insures two people but pays the death benefit after the death of the second insured person. The proceeds can be used to replace liabilities owed by the estate — or amounts left to charity — potentially without reducing the beneficiaries’ inheritance. Having liquid funds could also help heirs keep inherited assets such as a home or a business without having to sell them to pay estate liabilities.

Because the premium is based on the joint life expectancy of the insured individuals, survivorship life insurance generally costs less than two individual policies. It also may be easier to qualify for than two single policies. Of course, the earlier in life that life insurance is purchased, the less expensive it may be over the long term, and it may eliminate the possibility that you will not qualify for insurance if you acquire a chronic health condition later in life.

Life insurance proceeds are generally considered to be part of your taxable estate. If your goal is to keep the death benefit out of your estate, you might consider an irrevocable life insurance trust. Trusts involve a complex web of tax rules and regulations, so you should consider consulting with an experienced estate professional as well as your legal and tax advisors for guidance.

The cost and availability of life insurance depend on factors such as age, health, and the type and amount of insurance purchased. As with most financial decisions, there are expenses associated with the purchase of life insurance. Policies commonly have mortality and expense charges. In addition, if a policy is surrendered prematurely, there may be surrender charges and income tax implications. Before implementing a strategy involving life insurance, it would be prudent to make sure that you are insurable.

Survivorship life insurance offers a way to help cover estate liabilities without your heirs dipping into their inheritance. Even if your estate isn’t subject to estate taxes, the proceeds could provide them with a cash cushion for their futures.

The information in this article is not intended as tax or legal advice, and it may not be relied on for the purpose of avoiding any federal tax penalties. You are encouraged to seek tax or legal advice from an independent professional advisor. The content is derived from sources believed to be accurate. Neither the information presented nor any opinion expressed constitutes a solicitation for the purchase or sale of any security. This material was written and prepared by Emerald. © 2011 Emerald Connect, Inc.

Securities Offered Through ValMark Securities, Inc. Member FINRA, SIPC Investment Advisory Services Offered Through ValMark Advisers, Inc. a SEC Registered Investment Advisor 130 Springside Drive, Suite 300, Akron, Ohio 44333-2431* 1-800-765-5201. The Giles Financial Group is a separate entity from ValMark Securities, Inc. and ValMark Advisers, Inc.

PLEASE NOTE: The information being provided is strictly as a courtesy. When you link to any of the web sites provided here, you are leaving this web site. ValMark Securities, Inc. makes no representation as to the completeness or accuracy of information provided at these web sites. Nor is ValMark Securities, Inc. liable for any direct or indirect technical or system issues or any consequences arising out of your access to or your use of third-party technologies, web sites, information and programs made available through this web site. When you access one of these web sites, you are leaving our web site and assume total responsibility and risk for your use of the web sites you are linking to.

Investors should consult with their own professional advisor regarding the potential tax, estate, and legal considerations that may arise in connection with entering into a life settlements transaction. Proceeds from a life settlement transaction may be taxable under federal or state law to the extent the proceeds exceed the cost basis. The proceeds from a life settlement transaction may be subject to claims of creditors. The receipt of proceeds from a life settlement transaction may adversely impact eligibility for government benefits and entitlements. The amount received for the sale of the Policy may be impacted by the circumstances of the particular purchaser of the Policy, the insured’s life expectancy, future premiums, the death benefit, the terms of the Policy, and the current market for insurance policies, among other factors. The amount received for the sale of the Policy may be more or less than what others might receive for the sale of a similar policy. There may be high fees associated with the sell of a Life settlement.

Any tax advice contained herein is of a general nature and is not intended for public dissemination. Further, you should seek specific tax advice from your tax professional before pursuing any idea contemplated herein. This advice is being provided solely as an incidental service to our business as a financial planner.