Estate Planning

There is a mistaken impression that, at death, your assets will automatically be distributed to your loved ones. Instead, several “unwanted heirs” may step forward FIRST for their share of your estate. These unwanted heirs include: Federal Estate Tax, State Inheritance Tax and Estate Administrative Costs. So there are two taxes: taxes on the money you make (income tax); taxes on the money you keep (estate taxes).

A common misconception is that many people think that when federal estate taxes are payable, Uncle Sam simply takes his slice of their estate “pie”, leaving the balance for the estate owner’s heirs. While this result would be bad enough, what actually happens is even worse! In reality the federal estate tax is a TRANSFER TAX imposed on the privilege of transferring assets at death. The amount of tax payable is measured by the VALUE of the assets transferred from the estate to the heirs. What this means is, while the estate tax is levied on the value of assets transferred, the estate tax CANNOT be satisfied simply by transferring a percentage of estate assets to the IRS.

Instead, your estate must pay the federal estate tax in CASH, and it generally must pay it in NINE months! It may, however, be difficult, if not impossible, to liquidate sufficient non-liquid assets in order to pay the tax in cash.

How difficult would it be to convert 10 percent to 60 percent of your estate to CASH in just NINE MONTHS?

Potential Solutions

  1. 100% method – You could accumulate enough cash in your estate to pay estate settlement costs outright. Rarely, however, does a successful person accumulate such large sums of cash. Instead, the reason for financial success is usually due to the investment of cash in appreciating assets, rather than accumulating it in the bank.
  2. 100% Plus Method - Your estate could borrow the cash needed to pay estate settlement costs. This however, only defers the problem, since the money will then have to be repaid with interest.
  3. Forced Liquidation Method - Your estate could liquidate assets to pay estate settlement costs. Keep in mind, however, that the forced liquidation may bring only a small fraction of the true value of your assets if there is not a ready market. In addition, sales expenses are bound to be incurred.
  4. Discount Method - Assuming you qualify, you can arrange now to pay your estate tax bill with LIFE INSURANCE dollars. For every dollar your estate needs, you can give an insurance company from approximately one to seven cents a year, depending on your age and health. No matter how long you live, it is unlikely you will ever give the insurance company more than 100 cents on the dollar. In addition, the life insurance policy can frequently be structured to accommodate your unique premium payment requirements.

Ask yourself..Does it make sense to pay all of your estate settlement bill from estate assets within nine months of death or does it make more sense to set aside one to two percent of your estate each year now, while you are still in control? Regardless of your age, it is a fact that using LIFE INSURANCE is frequently the most economical method of providing needed estate liquidity.

I would be pleased to discuss estate planning with you, at your convenience, and advise you on the best personal plan for you.

Note: The 2010 Tax Relief Act provides a maximum 35% estate tax rate and a $5 million unified credit exemption equivalent ($5,120,000 in 2012), but “sunsets” at the end of 2012. This means that, without future Congressional action, the 2001 federal estate tax rules will be reinstated in 2013 with a maximum 55% estate tax rate and a $1 million unified credit exemption equivalent.