If upon death, you or another income-earning family member has earned a large amount of lifelong income, it’s another near certainty that any survivors will have to pay death-related taxes.
One of these is the federal estate tax, which has a rate that progressively increases with the size of a person’s estate. Being that it must be paid within nine months of a death, your family could be in for a problem if your largest assets are non-liquid forms of investment like businesses or real estate, warns Edward E. Graves, editor of “McGill’s Life Insurance.”
The Tax Policy Center provides information about estate taxes, including history and information about how many people pay them. It should also be noted that 15 states and the District of Columbia currently impose state-regulated death taxes added onto federal estate taxes. Additionally, federal gift taxes can add to post-death expenses if you or another family member makes a death-triggered nonexempt gift. The settlement of an estate can also result in gift taxes.
Tax deductions and exemptions, including the fate of estate taxes, are due to change Jan. 1, 2011 and will revert to their previous rates, if the Federal government doesn’t act to change their provisions.
In both cases, life insurance proceeds generate cash to both pay these taxes and keep any assets from being taxed so that your family is benefited.
According to Wells Fargo Advisors, here are some strategies you can use to avoid being hit by estate or “death” taxes:
1. Create an irrevocable life insurance trust for your existing life insurance policy. Also, irrevocable trusts can be created for your children in the form of a trust fund after your death.
2. Take advantage of the current one million dollar gift tax exemption and the 3.5 million dollar estate tax exemption.
3. While alive, gifts can be given tax-free to your recipients (up to 13,000 dollars) without using up your estate and gift tax exemptions.
4. Spend down the value of your estate by giving gifts to loved ones or charitable organizations, while you’re still alive.