Estate Planning as a Career

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Q: My colleague at work mentioned the importance of an ILIT for estate planning purposes.�What is an ILIT and how can it benefit our family?

The Problem - Gaping Hole in Estate Plan

You have worked hard to provide a good life for your family.�Now the government and state want to take away most of your assets when you pass away.�They hope you will overlook an important estate planning tool that allows you to avoid unnecessary taxes.

The Solution - Good Estate Planning

With an Irrevocable Life Insurance Trust (ILIT) you can protect one of your largest assets, the proceeds from your life insurance policy, from both federal and state estate taxes.�Sorry tax collectors - those are the rules.

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Basics on Estate Taxes

In 2008, each U.S. citizens is entitled to a federal estate tax exemption of $2 million, with a 45% tax rate thereafter.�Each NJ resident is entitled to a state estate tax exemption of $675,000, with an approximately 11%-16% tax rate (depending upon the beneficiaries and size of your estate) thereafter.�

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While many married couples utilize the unlimited spousal exemption to transfer assets and life insurance proceeds without tax, they are setting themselves up for a potentially huge tax burden when the second spouse passes away.�While the beneficiaries of life insurance polices are not subject to taxation, the owner’s estate could be - as life insurance is added to the estate’s value.�Let’s look at an example of a married couple with children.���

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Between the value of their home, retirement plans and savings Bob and Myrna have $2 million in assets.�Bob’s estate is protected by the $2 million estate tax exemption.�Bob purchased a life insurance policy for $2 million to protect his family, naming Myrna as the beneficiary.�When Bob passes away, neither his estate nor Myrna will be responsible for federal or state estate taxes due to the spousal exemption.�

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Unfortunately, by foregoing Bob’s federal and state exemptions, Bob and Myrna could be robbing their beneficiaries of their inheritance.�If Myrna passes away shortly thereafter, she will leave behind a $4 million estate.�If her children are the beneficiaries, Myrna’s estate will be subject to $900,000 in federal estate taxes.�If her siblings are the beneficiaries, Myrna’s estate will be subject to over $1.1 million in combined federal and state estate taxes.�

This assumes the assets none of the assets continue to grow after Bob passes away, an overly conservative assumption.

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ILIT Saves Taxes

Rather than paying unnecessary estate taxes, Bob worked with an estate planning attorney to establish an ILIT.�After they established a trust, they named a Trustee other than Bob to purchase a life insurance policy on Bob’s life.�Bob then gifted the price of the policy to the trust.�Bob stipulated who the beneficiaries were on the policy, how the beneficiaries will receive the proceeds and what conditions must be met to receive the proceeds.�Let’s look at Bob and Myrna’s circumstances after Bob established an ILIT.

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With the same assets and the same life insurance benefit, Bob passes away.�By utilizing the ILIT, Bob removes $2 million from his estate and passes $2 million in other assets to Myrna.�The trust was designed to pay Myrna $100,000 per year and each of their children $50,000 per year.�When Myrna passes away she leaves behind the full $2 million to her children, without the $900,000 tax bill discussed above.

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Action Steps

Establishing an ILIT is a critical part of good estate planning.�Work with a financial advisor and an estate planning attorney to establish your ILIT.�Your family will thank you for generations to come.

09/03/08

Skloff Financial Group Question of the Month By Aaron Skloff, AIF, CFA, MBA

Aaron Skloff, Accredited Investment Fiduciary (AIF), Chartered Financial Analyst (CFA), Master of Business Administration (MBA) is CEO of Skloff Financial Group, a Registered Investment Advisory firm based in Berkeley Heights, NJ. He can be contacted at http://www.skloff.com or 908-464-3060.

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This entry was posted on Friday, July 3rd, 2009 at 7:02 am and is filed under , Estates, Wills, Trusts, Career Information, Blog Carnival. You can follow any responses to this entry through the RSS 2.0 feed. You can leave a response, or trackback from your own site.