Dealing With the Coming Estate Tax
August 12th, 2010 Filed under: Estate Planning — Estate Planning Author
There are taxes and then there are TAXES! The coming estate tax definitely is going to be a big one that will make you shake your head. This is because the tax of the deceased has always been one of the largest we have in the internal revenue code. You must address it if you hope to leave your assets to heirs instead of Uncle Sam.
The estate tax has often been called the death tax. This is because it is the tax that arises when a person dies. Historically, the tax has worked by creating an exempt amount and then a tax on any amount of valuation in the estate in excess of that. For example, the internal revenue code may state that the first million dollars of value in the estate are not taxed, but everything above that amount is taxed at a 55 percent rate.
The estate tax is currently in a big state of flux. The “Bush tax cuts” included a drawing down mechanism on it. This effectively means the tax rate has dropped each year from an original 55 percent. In fact, the rate has dropped to zero percent in 2010. The problem is this will not last. 2011 will see the resumption of the tax in its full glory as they say. All indications are it will return to the 55 percent level with some form of exemption that hasn’t been determined yet.
How can you plan for the estate tax? There are a myriad of strategies. One I am personally fond of us is the irrevocable life insurance trust. This trust allows you to buy life insurance and keep the proceeds separate from your estate. When you pass away, the insurance pays out and the funds can be used to pay the estate tax. This allows your family and heirs to keep the illiquid assets you are passing down to them such as property, businesses and the like.
Barry Milton writes about financial planning for UFCAmerica.com.
