PRESERVING YOUR WEALTH WITH INSURANCE TRUSTS

     If you have a sizable estate, you may face losing a good portion of it to the Internal Revenue Service to pay estate taxes. If you have assets worth over $675,000, the amount above that will be subject to estate taxes beginning at a rate of 37% up to 55%. Even if you are married and have a Revocable or Living Trust, if your estate exceeds $1,350,000, estate taxes will be due on anything above that. However, there is a way to alleviate the tax bite.

     One way to protect your hard earned assets is to set up an insurance trust. Unlike the Revocable or Living Trust that can be amended or revoked, the insurance trust must be irrevocable. The insurance trust is the owner of the insurance policy on your life. Upon your death the insurance proceeds are payable to the beneficiaries you name. Because the trust, not you, owns the policy, it is not considered part of your estate and the proceeds will escape estate taxes. Your beneficiaries will receive the whole amount of the proceeds which they can use to pay any estate taxes and they can keep the remainder.

     Quite often, although an estate is sizable (and therefore subject to estate taxes) many of the assets are not liquid. In other words, the estate may be composed of mostly real estate or other non-cash assets; it is “cash poor”. This makes it difficult to come up with enough cash to pay the taxes within the 9 months allowed by the IRS. It may take longer to sell enough assets to acquire the needed cash. By having the life insurance proceeds immediately available, your beneficiaries will have the cash to pay any estate taxes due.

     For example, let’s take Lorna and Wesley who are in their mid-70's. They have accumulated an estate worth 2.5 million dollars. With current estate planning rules in place, the most they can shelter from estate taxes using a Living Trust if they die in 2001 is $1,350,000. That means $1,150,000 will be subject to estate taxes in the amount of $407,300. This leaves $2,092,700 for their children.

     Now consider what would happen if Lorna and Wesley purchased life insurance on the life of the survivor of them in the amount of $500,000. Suppose they could purchase a policy for a premium of $14,000 per year. When the second of them dies, the life insurance proceeds can be used to pay whatever estate taxes are due at that time with any excess proceeds going to their children. So, assuming that the estate taxes are $407,300, the insurance proceeds will be sufficient to pay the taxes and have $92,700 left over for their children. The total the children will receive is $2,592,700, an increase of $500,000.

     If this is such a good idea why doesn’t everyone with a sizable estate have an insurance trust? First of all, they may not know these trusts are available. Second, insurance trusts are subject to very specific rules established by the IRS. Third, your age or health may dictate whether or not it is feasible to implement such a trust. Fourth, the trust is irrevocable and cannot be changed or revoked. Fifth, the trust must be set up properly or it could increase, rather than decrease, your estate tax liability.
If you feel you may benefit from this kind of protection, you should seek the advice of qualified financial and legal professionals to create the right trust for you. Why make the government a beneficiary of your estate when you can pass more (or all) of your assets to your heirs?

– «» –