New York Estate Planning & Elder Law Blog
The federal estate tax exclusion was recently raised to $11.4, but there are cases where large estates or businesses are transferred to beneficiaries and the recipients are subject to estate taxes. In some situations, the only way for your loved ones to pay for the taxes that accompany these assets is to sell the very assets that you hoped to pass on.
Several estate planning strategies that can be utilized to avoid the risk that your loved ones will end up paying estate taxes. One of the best methods to avoid these estate taxes is to use an irrevocable life insurance trust.
How Life Insurance Trusts Work
For individuals who have illiquid assets, or assets that cannot easily be converted into cash like family businesses or land, irrevocable life insurance trusts are often a good option. These trusts are also a good choice for individuals who want to pass assets on to charities. Assets that are placed into the trust will pass to the beneficiaries according to the terms of the trust without being forced to pay federal estate taxes. It is possible to avoid taxes because the trust is considered the owner of these assets.
As a result, following the trust creator’s death, the assets in the trust will pass to beneficiaries without being subject to taxes. Many people decide to fund these trusts through annual exclusion gifts, but these trusts are also capable of being funded by using premium or private financing.
The Advantages of these Trusts
Not only can these trusts help the trust creator and beneficiaries avoid taxes, but proceeds from the trusts can also be used to pay other expenses and taxes that might arise following the person’s death. These trusts also allow a person to donate to a charity while also passing on any desire assets for beneficiaries.
Additionally, gifts made to these trusts reduce the value of a person’s estate which reduces the amount of the estate when taxes are considered. An experienced estate planning lawyer can also help to review the terms of your estate to determine what other advantages might be realized through the creation of this trust.
The Shortcomings of these Trusts
If you are debating creating an irrevocable life insurance trust, it is a good idea to be aware of the gift tax liability. In 2019, any gift that is greater than $15,000 for the year for single individuals or $30,000 for married couples applies against the gift-tax exclusion and requires filing a Form 709. Often, this is not enough for proper estate planning. Consequently, many people find that they need larger policies that allow more than what the annual gift exclusion allows. There are several risks associated with premium financing, which include lending rates that increase to higher than projected levels or financial institutions requiring borrowers to provide liquid collateral.
Contact an Experienced Estate Planning Lawyer
There are many complex issues to navigate during the estate planning process. If you or your loved one needs the assistance of an experienced estate planning lawyer, do not hesitate to contact Ettinger Estate Planning today.