There's a good chance that you've heard that federal estate taxes are scheduled to disappear in 2010, yet return in 2011. Many people, however, expect major changes before then. What these changes will be though is anyone's guess. Therefore, some investors have taken the 'wait and see attitude' when it comes to estate planning since they think the tax will go away. However, with the looming federal deficit, Congress could be hard-pressed to repeal the federal estate tax.
Investors with estates in excess of $1.5 million, who realize their estates could be hit with estate taxes, have sometimes used irrevocable life insurance trusts (ILITs) to provide the needed funds to pay these taxes. These trusts can also be used to convert funds that are otherwise taxable into a death benefit for younger family that comes free of federal income and estate taxes. But some couples might shy away from an ILIT because of the inability to get at money that they may need for other purposes. With this in mind, there is another type of trust that could provide what those couples want: liquidity and flexibility.
A survivor access trust allows a beneficiary tax-free access to the cash value of life insurance within the trust. The amount that can be withdrawn is described as enough to preserve the lifestyle that the beneficiary is accustomed to living. The grantor spouse pays the premiums and cannot touch the cash value. This keeps the death benefits out of his or her taxable estate. But by association with the beneficiary spouse, the grantor can arguably benefit from the distributions to the spouse. Of course, the death benefit of the life policy could be reduced by any amounts withdrawn by the beneficiary.
To remove the proceeds from the beneficiary's estate, a trustee must be used. This can be an institution, such as a bank, or a family member other than the grantor or his or her spouse. Also, the beneficiary cannot contribute to the trust.
No one knows whether or not the estate tax will be permanently repealed in 2011. Therefore, it is important to have an estate plan that is flexible. For a free illustration on how life insurance could possibly provide for your survivors and reduce estate taxes.
Note: Life insurance is subject to medical underwriting and death benefits will vary based among other things upon your age, health, and premiums. Fees and other expenses will apply with the purchase of life insurance, and surrender charges may be applicable on money withdrawn or benefits reduced after the policy purchase date. Insurance benefits and premiums do vary from company to company. Insurance guarantees are subject to the claims-paying ability of the issuing company.
Securities and Investment advisory services offered through Capital Analysts Incorporated Member NASD; SIPC.